What is a Financial Statement Review?

A financial statement review is a service under which the accountant obtains limited assurance that there are no material modifications that need to be made to an entitys financial statements for them to be in conformity with the applicable financial reporting framework (such as GAAP or IFRS). A review does not require the accountant to obtain an understanding of internal control, or to assess fraud risk, or other types of audit procedures. Consequently, a review does not provide the accountant with assurance that he has become aware of all the significant matters that would normally have been discovered and disclosed in an audit.

The review is more expensive than a compilation and less expensive than an audit. It is preferred by those businesses whose lenders and creditors will allow them to use this approach, thereby saving the cost of a full audit.

In a review, management takes responsibility for the preparation and presentation of the entitys financial statements, while the accountant should have a sufficient level of knowledge of both the industry and the entity to review the financial statements.

Procedures Used in a Financial Statement Review

In a financial statement review, the accountant performs those procedures necessary to provide a reasonable basis for obtaining limited assurance that no material changes are needed to bring the financial statements into compliance with the applicable financial reporting framework. These procedures are more heavily concentrated in areas where there are enhanced risks of misstatement. The types of procedures that would be reasonable to conduct for a review include:

  • Conduct a ratio analysis with historical, forecasted, and industry results

  • Investigate findings that appear to be inconsistent

  • Inquire about the procedures for recording accounting transactions

  • Investigate unusual or complex situations that may impact reported results

  • Investigate significant transactions occurring near the end of the accounting period

  • Follow up on questions that arose during previous reviews

  • Inquire about material events that occurred after the date of the financial statements

  • Investigate significant journal entries

  • Review communications from regulatory agencies

  • Read the financial statements to see if they appear to conform with the applicable financial reporting framework

  • Review the management reports of any accountants who reviewed or audited the entitys financial statements in prior periods

There are also a number of review steps that can be utilized in specific areas, such as:

The preceding list represents a sampling of the review activities that an accountant could engage in.

If the accountant believes that the financial statements are materially misstated, he should perform additional procedures to obtain a limited assurance that there is no need to make material modifications to the financial statements. If the statements are materially misstated, the accountant must choose between disclosing the issue in the report that accompanies the financial statements, or of withdrawing from the review.

Related Courses

How to Conduct a Review Engagement
How to Conduct an Audit Engagement

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