AUD · Forming Conclusions & Reporting · 6 practice questions
SSARS Review: Qualified Conclusion for a GAAP Departure
A known material but not pervasive GAAP departure that management will not correct requires a qualified review conclusion. Follow Delta's omitted depreciation through a decision tree for the basis paragraph, effects, and except-for wording.
Try one first
Hint
Management refuses to fix a known departure that is material but not pervasive. Match that severity level to the correct form of review conclusion before considering more drastic responses.
Answer C. Under AR-C 90, when the accountant becomes aware of a known departure from the applicable financial reporting framework that is material and management refuses to revise the financial statements, the accountant modifies the review conclusion. Because the unrecorded depreciation is material but not pervasive, the appropriate response is a qualified conclusion, with a basis-for-qualified-conclusion section describing the departure and, when practicable, its effects on the financial statements. As a bonus point, remember that issuing a report on financial statements that omit substantially all disclosures is permitted only in a compilation under AR-C 80; a review under AR-C 90 must be performed on full-disclosure financial statements, so an omitted-disclosures alternative is never available in a review.
Why not A: An emphasis-of-matter paragraph is tempting because it puts the issue in the report, but emphasis paragraphs may refer only to matters appropriately presented or disclosed in the statements. A known material departure requires a modified conclusion; an unmodified conclusion plus an added paragraph understates the problem.
Why not B: An adverse conclusion is reserved for departures that are both material and pervasive to the financial statements. The stem says this departure is material but not pervasive, so a qualified conclusion is the right level of modification.
Why not D: Withdrawal is tempting because management refused to correct the statements, but withdrawal is necessary only when modification of the report is not adequate to communicate the deficiencies, such as when the statements are intended to mislead. Here the CPA concluded the departure can be adequately described, so a qualified conclusion is appropriate.
Decide it in order
T1Delta omitted equipment depreciation from its U.S. GAAP statements. Management added a note but refuses an adjustment. The CPA completed the SSARS review and obtained required written representations. Is the remaining departure material?
YesGo to T2NoThis issue does not require qualification. With no other reporting issues, issue an unmodified review conclusion using the standard 'we are not aware of any material modifications' wording.T2Is Delta's material departure pervasive to the financial statements?
YesIssue an adverse review conclusion with a separate basis section describing the departure and its effects when practicable. Material and pervasive departures do not receive an except-for conclusion.NoGo to T3T3Is it practicable to determine the financial statement effects of Delta's omitted depreciation?
YesIssue a qualified review conclusion, not automatic withdrawal. In a separate Basis for Qualified Conclusion section, describe the omitted depreciation and quantify its effects. Use 'except for the effects' while retaining the review's 'we are not aware of any material modifications' wording.NoIssue a qualified review conclusion. In a separate Basis for Qualified Conclusion section, describe the omitted depreciation and state that its effects are not reasonably determinable. Use 'except for the effects' while retaining the review's 'we are not aware of any material modifications' wording.
Key points
- Remember: A note disclosing omitted depreciation does not record it; the accounting departure remains.
- A review conclusion keeps the 'we are not aware' wording. It is not an audit opinion.
- Management's refusal alone does not require withdrawal when the review is complete and the departure can be adequately reported.
How the exam traps you
- Treating management's note as a correction of the omitted depreciation. The note does not fix the accounting. Modify the conclusion if the departure remains material.
- Choosing an adverse conclusion merely because the departure is material. Adverse requires material and pervasive effects. Material but not pervasive supports a qualified conclusion.
- Withdrawing automatically because management refuses the adjustment. Issue the appropriate modified report when the review is complete and the departure can be adequately communicated.
Question 2
Hint
Separate the issue of a known material departure from the issue of a scope limitation. In a review, those do not lead to the same reporting response.
Answer C. When an accountant performing a review becomes aware of a known material departure from the applicable framework and management refuses to revise the statements, the appropriate response is ordinarily to modify the review report to describe the departure and, when reasonably determinable, its effects. Because Lane completed the planned procedures, obtained representations, found no scope limitation, and can estimate the effect, modifying the review report is the correct action.
Why not A: Tempting if one focuses on limited assurance, but incorrect: limited assurance does not eliminate the accountant's responsibility to disclose known material departures; an unmodified report would be inappropriate.
Why not B: The accountant cannot unilaterally downgrade the engagement to avoid addressing a material departure. The appropriate response in a review is to modify the review report rather than convert to a compilation.
Why not D: Withdrawal may be appropriate in some circumstances (for example, severe scope limitations or pervasive issues), but here there is no scope limitation and the effect is reasonably determinable, so modification, not withdrawal, is the usual response.
Question 3
Hint
Separate a known GAAP departure from a scope problem. Then decide whether the departure is material only or material and pervasive.
Answer A. Under SSARS, when the accountant is aware of a material departure from the applicable financial reporting framework and management refuses to correct it, the accountant should modify the review conclusion rather than issue an unmodified report. Because Lee concluded the misstatement is material but not pervasive and can be described, an except-for (modified) conclusion that explains the departure and its effects is appropriate. Withdrawal or a disclaimer is appropriate only when there is a scope limitation or inability to obtain sufficient evidence, not for a known misstatement that can be described.
Why not B: Tempting because reviews provide limited assurance and disclosures matter, but a disclosure note does not cure a known material GAAP measurement or recognition departure. Once the accountant is aware of a material departure, an unmodified conclusion is not appropriate.
Why not C: Withdrawal may seem conservative, but SSARS does not require withdrawal merely because management refuses to correct a material departure if the accountant can describe the matter in a modified report. Withdrawal is appropriate only in limited circumstances where continued association would be misleading or professional obligations cannot be met.
Why not D: A disclaimer is used when the accountant cannot obtain sufficient appropriate evidence or is unable to perform necessary procedures (a scope limitation), not when the accountant knows the nature and effect of a material misstatement. Here Lee can describe the departure, so a modified (except-for) conclusion is correct, not a disclaimer.
Question 4
Hint
Focus first on the type of engagement, then ask what SSARS requires when management refuses to correct a known material GAAP departure.
Answer A. For a review under SSARS, when the accountant becomes aware of a known, material departure from GAAP and management will not revise the financial statements, the accountant should describe the departure in a separate paragraph and modify the review conclusion (using except-for language). A standard conclusion is inappropriate and audit opinion language is not used in a review report.
Why not B: This distractor plays on the fact that the matter was disclosed. However, because GAAP required recognition of the liability and loss and the omission is a known material departure, simply adding an emphasis-of-matter paragraph without modifying the conclusion is not sufficient.
Why not C: Withdrawing may be appropriate in some circumstances, but SSARS does not require withdrawal whenever management refuses to correct a material misstatement; if the departure is known and can be described, the accountant ordinarily issues a modified review report instead.
Why not D: An adverse opinion is an audit concept. Review engagements provide limited assurance and a review conclusion, not an audit opinion, so adverse-opinion language is not the correct reporting form here.
Question 5
Hint
Consider whether disclosure alone is adequate when there's a known material GAAP departure that management will not correct, must the accountant's conclusion also change?
Answer D. Under SSARS, when the accountant becomes aware of a material departure from the applicable financial reporting framework and management refuses to revise the financial statements, the accountant should issue a modified review report. The report should describe the known departure, state if the effects have not been determined, and modify the conclusion to reflect that the financial statements are not presented in conformity with GAAP.
Why not A: Tempting because refusal to correct might seem to leave no alternative, yet withdrawal is not required here. SSARS permits issuing a modified review report describing the departure and modifying the conclusion; withdrawal is generally reserved for scope limitations or other extraordinary circumstances.
Why not B: Tempting because reviews provide limited assurance and adding an other‑matter paragraph may seem to inform users; however, a known material departure requires modification of the conclusion. An unmodified review report would be inconsistent with SSARS when management refuses to correct a material GAAP departure.
Why not C: Tempting because disclosure appears to notify users and reviews are not opinions, but merely describing the departure without changing the conclusion understates its significance. SSARS requires the conclusion itself to be modified when a material departure exists and management will not correct it.
Question 6
Hint
Focus on how a review report changes when the accountant knows about a GAAP departure and the problem is material, but not pervasive.
Answer A. Under SSARS, when an accountant becomes aware of a material misstatement in a review and management does not correct it, the accountant must modify the conclusion. If the misstatement is material but not pervasive, the appropriate modification is a qualified conclusion that describes the omitted disclosure. A stronger modification (adverse) is reserved for material and pervasive misstatements.
Why not B: Although reviews provide limited assurance, that does not permit the accountant to ignore a known material GAAP departure. When a material misstatement is known and not corrected, the conclusion must be modified rather than left unmodified.
Why not C: An adverse conclusion is appropriate only when the misstatement is both material and pervasive. The fact pattern specifies the omission is material but not pervasive, which supports a qualified (modified) conclusion instead.
Why not D: Withdrawal is not required here because there is no scope limitation and the accountant can still perform review procedures and modify the report to reflect the uncorrected material misstatement. Withdrawal would be considered only in circumstances that prevent the accountant from completing required procedures or communicating appropriately.
Common questions
What wording does a qualified SSARS review conclusion use?
Use 'except for the effects' of the departure while retaining the review's 'we are not aware of any material modifications' wording. Describe the departure in a separate Basis for Qualified Conclusion section.
Can a note about omitted depreciation avoid a qualified review conclusion?
No. Disclosure does not correct the omitted expense and accumulated depreciation. If the departure remains material but not pervasive, qualify the review conclusion.
What if the effects of a GAAP departure cannot be determined?
Describe the departure and state that its effects are not reasonably determinable. In this material but not pervasive case, inability to quantify the effects does not eliminate the qualified conclusion.
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