SRE 2400 (Revised): How to Review Historical Financial Statements When You Are Not the Entity’s Auditor

SRE 2400 (Revised) is the ICAI review standard for historical financial statements when the practitioner is not the auditor of the entity's financial statements. That boundary is easy to miss. A review is also not a smaller audit: it is a limited assurance engagement in which the practitioner primarily uses inquiry and analytical procedures, then performs additional work if something suggests that the financial statements may be materially misstated.

The current ICAI Engagement and Quality Control Standards repository lists SRE 2400 (Revised) among the Standards on Review Engagements. The full requirements are available in the official SRE 2400 (Revised) text.

First decide whether SRE 2400 is the right standard

SRE 2400 applies to a review of historical financial statements when the practitioner is not the auditor of those financial statements. It may also be adapted as necessary to reviews of other historical financial information.

This is different from SRE 2410, which addresses a review of interim financial information performed by the independent auditor of the entity. SRE 2410 itself explains that a practitioner who is not the entity's auditor performs an interim review under SRE 2400 (Revised), because that practitioner does not ordinarily have the same audit-derived understanding of the entity and its internal control.

What assurance does a review provide?

A review under SRE 2400 is a limited assurance engagement. The practitioner obtains sufficient appropriate evidence to reduce engagement risk to an acceptable level for a review, but that risk remains higher than in a reasonable assurance engagement such as an audit.

The conclusion therefore uses limited-assurance wording rather than an audit opinion. In an unmodified conclusion, the practitioner states in substance that, based on the review, nothing has come to the practitioner's attention that causes the practitioner to believe the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework. This distinction matters when management, lenders or investors describe a review as an audit substitute; it is not one where an audit is required by law or by the terms of an engagement.

Step 1: perform the acceptance and precondition checks

Before accepting the engagement, the practitioner should establish that there is a rational purpose for the review and that a review is appropriate in the circumstances. SRE 2400 also requires attention to relevant ethical requirements, including independence, the likely availability and reliability of information, management integrity and any proposed scope limitation that could lead to a disclaimer of conclusion.

The practitioner also determines whether the applicable financial reporting framework is acceptable and obtains management's acknowledgement of its responsibilities. Those responsibilities include preparing the financial statements, maintaining the internal control management considers necessary for financial statements free from material misstatement, providing relevant records and additional information requested for the review, and allowing unrestricted access to persons from whom the practitioner considers it necessary to obtain evidence.

Step 2: design inquiry and analytical procedures around material areas

The core evidence-gathering work is not a mechanical ratio exercise. SRE 2400 requires inquiry and analytical procedures that address material items and disclosures and focus on areas where material misstatements are likely to arise.

Management inquiries can cover significant accounting estimates, related parties and related party transactions, unusual or complex transactions, significant journal entries and year-end transactions, prior uncorrected misstatements, fraud or illegal acts, relevant non-compliance with laws and regulations, and events between the financial-statement date and the practitioner's report date. The practitioner also considers going concern where relevant.

Analytical procedures should be designed to identify relationships or movements that need explanation. Useful comparisons may include current-period results against prior periods, budgets or expectations; margin and expense relationships; working-capital movements; or financial information compared with relevant non-financial information. The objective is to identify areas requiring inquiry and evidence, not to create a checklist of ratios.

Step 3: reconcile the financial statements to the accounting records

SRE 2400 specifically requires the practitioner to obtain evidence that the financial statements agree with, or reconcile to, the entity's underlying accounting records. This is a practical control point: even persuasive explanations of trends do not replace establishing that the reviewed statements are anchored to the records from which they were prepared.

Step 4: investigate indicators of possible material misstatement

If a matter comes to the practitioner's attention that causes the practitioner to believe the financial statements may be materially misstated, the work cannot stop with the original inquiry or analytical procedure. The practitioner must design and perform additional procedures sufficient either to conclude that the matter is unlikely to cause the financial statements as a whole to be materially misstated or to determine that the matter does cause a material misstatement.

Short example

Assume a private company asks a CA firm that is not its statutory auditor to review its annual financial statements for a lender. Gross margin rises from 22% to 31% while sales volume and product mix appear broadly unchanged. A review should not end with management saying that purchasing improved. The practitioner would inquire into the reason for the change, test whether the explanation is consistent with the underlying information and perform additional procedures if the unusual relationship indicates a possible material misstatement. If the issue cannot be resolved through sufficient appropriate evidence, the reporting consequence must be evaluated.

Step 5: deal with going concern and subsequent events

A review includes consideration of the entity's ability to continue as a going concern. If events or conditions come to the practitioner's attention that may cast significant doubt, the practitioner inquires about management's future plans and evaluates whether management's responses provide a sufficient basis for the financial-statement conclusion.

SRE 2400 also addresses subsequent events. If the practitioner becomes aware, before the report date, of an event requiring adjustment or disclosure, management should be asked to correct the financial statements. The standard also sets out steps for facts discovered after the report date in circumstances where they may have affected the report.

Step 6: obtain written representations and evaluate the conclusion

SRE 2400 contains specific written-representation requirements, but representations do not replace other evidence needed for the review. At completion, the practitioner evaluates the financial statements under the applicable reporting framework, including significant accounting policies, estimates, disclosures, identified uncorrected misstatements and qualitative aspects of management's accounting practices.

If limited assurance has been obtained and no material departure requires modification, the practitioner gives an unmodified conclusion. If the financial statements are materially misstated, a qualified conclusion is used when the effects are material but not pervasive, while an adverse conclusion is used when they are both material and pervasive. Where sufficient appropriate evidence cannot be obtained, the form of modification depends on the possible effects; in the more pervasive case a disclaimer of conclusion may be required.

Practical SRE 2400 file checklist

1. Confirm that the practitioner is not the entity's auditor and that SRE 2400 is the applicable review standard.
2. Document the purpose of the engagement, independence and ethical considerations, management integrity and any scope limitations.
3. Confirm the acceptable reporting framework and management's acknowledgement of its responsibilities.
4. Understand the entity sufficiently to target material balances, disclosures and likely misstatement areas.
5. Design inquiries and analytical procedures that respond to those areas rather than using a generic ratio template.
6. Reconcile the financial statements to the underlying accounting records.
7. Follow up unexplained relationships or other indicators of possible material misstatement with additional procedures.
8. Consider going concern, subsequent events and required written representations.
9. Evaluate identified misstatements and evidence gaps before deciding whether the conclusion is unmodified, qualified, adverse or a disclaimer.
10. Keep documentation that explains the procedures performed, evidence obtained, significant judgments and the basis for the final conclusion.

Common mistakes

• Calling a review a mini-audit or suggesting that it provides audit-level assurance.
• Using SRE 2410 merely because the financial information is interim, without first considering whether the practitioner is the entity's auditor.
• Performing standard ratios without linking them to material items and likely misstatement areas.
• Accepting management explanations for unusual movements without follow-up when a possible material misstatement is indicated.
• Failing to reconcile the reviewed financial statements to the underlying accounting records.
• Treating written representations as a substitute for evidence.
• Ignoring the reporting impact when evidence cannot be obtained or a material misstatement remains uncorrected.

Practical takeaway

SRE 2400 is most useful when its limited-assurance logic is kept clear from the start: confirm that the engagement belongs under SRE 2400, establish sound acceptance conditions, focus inquiry and analytics on material risk areas, reconcile the statements to the records, investigate anomalies rather than explaining them away, and let the evidence determine the form of conclusion. For a CA, the quality of a review comes from disciplined judgment and follow-up, not from reducing an audit programme to fewer procedures.