What to Expect from a Limited Review?

Background

The financial statements reflect the financial position, performance and cash flow of an entity. These financial statements are typically prepared on an annual basis which is also expected to be audited (if it is a company then under the Companies Act 2013 or respective regulation). The financial statements are used by the stakeholders to make certain decisions. Instead of giving the information on an annual basis, the regulators formed a law under SEBI Guidelines in India to provide the information on a quarterly basis in a condensed form and in a prescribed format Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR) (Read Regulation 33 of SEBI LODR Guidelines 2015, duly amended). The objective of this article is only to give a basis outline of what to expect from a limited review.

Reporting requirement: As per the above regulation, the listed companies would have to report the Statement of Profit and Loss of:

1. Current quarter
2. Previous quarter
3. Previous year
4. Year-to-date figures
5. Significant developments in business, changes in accounting policies, impact of changes in accounting standards, etc.,
6. Segment Reporting;
7. And on a half-yearly basis even the Balance Sheet.

The format of the reporting requirement is given in SEBI LODR Guidelines.

Who should do the Limited Review?

In case of listed companies, the limited review is done by the statutory auditor of the Company. The Statutory Auditor should use SRE 2410 – Review of Interim Financial Information Performed by the Independent Auditor of the Entity’, as issued by the Institute of Chartered Accountants of India. Limited Review can also be done by other than the statutory auditor, in which case SRE 2400(Revised), Engagements to Review Historical Financial Statements, needs to be followed. But generally, it is preferred that the statutory auditor does the review considering they are aware of the client’s accounts, business, internal control systems, and SEBI expects the statutory auditors to carry out the limited review.

What is expected out of limited review?

An audit is designed to obtain reasonable assurance to ensure that the financial statements are free from any material misstatements. In a limited review, the interim financial information is expected to be analytically reviewed and inquiry procedures are conducted to identify whether the interim financial information is free from material misstatement. In fact, the statutory auditor who does the review, gives the title as ‘Limited Review Report’ and also mentions that this is not an audit and the procedures carried out are not expected or designed to given an audit opinion.

What are the limited review procedures?

1. Updates on the business: Discuss with the client on the developments in business and how any thing may impact on financial reporting, internal controls etc., For example, it could be new product launches or discontinuation of a product or service, changes in key managerial personnel, changes in the internal control systems, etc.,
2. Review of the minutes of the meetings of the directors, shareholders, audit committee to understand the decisions taken.
3. Impact of any modifications in the previous year’s audit report
4. Changes in accounting policies or impact of any new accounting standards or interpretations thereto.
5. Modifications to any significant commitments or obligations
6. Get an update on various litigation, contingent liabilities, etc.,
7. Review transactions with related parties with respect to pricing and disclosures.
8. Review the consistency of valuation principles and input data given to experts like Actuary.
9. Check on repayment of loans specially to banks and financial institution
10. Enquire about any suspected fraud or fraud
11. Review the going concern situation especially in times of pandemic when there is high risk of business being affected, or previously going concern issue was raised and discussed, feasibility of future business;
12. Inquiry into regulatory changes which may have impact on operations.
13. Most importantly, analytical procedures:
    1. Use of accounting ratios;
    2. Statistical tools like correlation, trend analysis, same base comparison;
    3. Quarter on Quarter / Period Vs. Period analysis.
14. If there is a consolidated interim financial information to be reviewed, coordinate with the auditors of the subsidiaries, joint ventures and associates.
15. Presenting to the audit committee, Board of Directors on key findings of the limited review.

What is the expected outcome?

Well, after doing all the above (again depending on the judgement of the professional, there could be other similar procedures that could have been carried out), if there are any material misstatements, the management should be informed to rectify the same.

What is in the limited review report? (Refer Appendix to SRE 2410)

1. Introduction to the engagement and responsibility of the management and the reviewer;
2. Scope of the review.
3. Conclusion, which typically (unless the circumstance demands otherwise) is, “Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information does not give a true and fair view of the state of affairs of the entity as at (a particular date), and of its results of operations and its cash flows for the period then ended in accordance with (applicable financial reporting framework), applicable in India.
4. Other Matter paragraph: If there are any other matters relating to engagement, for example restriction on circulation or particular objective is for the purpose of preparing consolidated interim financial information etc.,
5. Emphasis of Matter paragraph: if there are any items that are given in the notes to the interim financial information, which Auditor under SA 706 requires it to be highlighted.
6. Modified Conclusion: If the auditor is of the view that the interim financial information is materially misstated (could be a qualification, adverse opinion or disclaimer of opinion).

Documentation aspects

1. Engagement Letter;
2. Work papers relating to inquiries with the management including the minutes of the meeting;
3. Extracts from the minutes of the meeting of the members, shareholders, audit committee etc.,
4. Workings on the analytical procedures carried out
5. Review of the internal control systems
6. Review of the interim financial information.
7. Management Representation letter.

What are the financial / accounting standards applicable?

Listed entities have to apply Ind AS 34 - Interim Financial Reporting’ and other entities to use AS 25 accordingly. But both AS 25 and Ind AS 34 clearly mentions that this standard is not applicable to any interim financial information to be provided to a regulatory agency. AS 25 or Ind AS 34 is applicable where any entity chooses to prepare interim financial information which is defined separately in the respective standards. As the prepares of the interim financial information, one has to select only the recognition and measurement principles covered in AS 24 / Ind AS 34 and use them for the purpose of regulatory reporting, which is also mentioned in the limited review report.

The author Aditya Kumar S is a qualified Chartered accountant with 20+ years of experience in his field. He carries immense knowledge in his areas of expertise and interest, namely statutory audit, internal audit and SOX audit gained through numerous and varied client assignments he has dealt with. He is a partner in South India’s well known mid-size firm.