Auditor Liability in Interim Reviews: Reporting vs. Non-Reporting

In the context of interim financial reviews, whether an independent auditor issues a review report or simply performs the review and does not issue a report, it is crucial to understand the implications for auditor liability. This discussion explores the legal and practical considerations surrounding the issuance of a review report, the auditor's liability, and the applicability of relevant auditing standards such as IAS 34.

Overview of Interim Reviews and Reporting

Interim reviews involve the evaluation of financial information prepared during a specific period that is shorter than a full financial year. These reviews are an essential part of the continuous disclosure requirements for many publicly-traded entities. However, the choice to issue a review report or simply perform the review without issuing a report can have different implications for auditor liability.

Auditor Liability and Completion of the Review

The issuance of a review report when a review has been performed does not create additional liability for the auditor. According to professional standards and guidelines, the performance of a review is typically covered by an engagement letter between the auditors and the company's management. Furthermore, auditing standards such as AS 34 do not mandate the issuance of a review report.

Typically, when an auditor is found to have liability, it is because they have provided an opinion in a report, such as: 'In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position…' This type of opinion is what can lead to liability if later determined to be incorrect. In the case of a review, since it does not issue an opinion but rather a summary, the likelihood of such liability is substantially lower.

Legal Framework and IAS 34

IAS 34, which was issued in June 1998 and applicable from January 1999, outlines the principles for interim financial reporting. The Deloitte guide, published in 2009, provides comprehensive guidance on the application of IAS 34, including a compliance checklist and a model interim financial report.

Scope and Application of IAS 34

IAS 34 aims to prescribe the minimum content of an interim financial report and the principles for recognition and measurement. An interim period is defined as a financial reporting period shorter than a full financial year, typically a quarter or half-year. An interim financial report can either be a complete set of financial statements or a condensed set.

Content Requirements for Interim Financial Reports

The minimum components that must be included in an interim financial report are:

Condensed balance sheet (statement of financial position) Condensed statement of comprehensive income (or combined statement of income and comprehensive income) Condensed statement of changes in equity Condensed statement of cash flows Selected explanatory notes

These components ensure that the interim financial information reflects the accurate financial position of the entity. If a complete set of financial statements is issued during an interim period, they must comply fully with the IFRS standards.

Conclusion

In conclusion, the decision to issue a review report or not when performing an interim review has minimal impact on auditor liability. The focus on accurate and timely interim reporting is essential for maintaining investor confidence and regulatory compliance. Organizations and auditors should adhere to established guidelines like IAS 34 and the Deloitte guide to ensure that interim financial reporting meets the necessary standards.