Internal Financial Statement Review Checklist

An internal financial statement review is a management-led process to ensure a company’s financial reports are accurate and fairly presented, which is distinct from an external audit by a Certified Public Accountant (CPA) that provides assurance to outside parties. The internal review is a self-assessment for company leadership, designed to detect and correct material misstatements before the statements are finalized. This examination helps management gain confidence in the financial results by systematically checking underlying records and assumptions. By undertaking this process, a company can identify weaknesses in its accounting procedures and internal controls, allowing for timely improvements to produce reliable statements compliant with Generally Accepted Accounting Principles (GAAP).

Preliminary Verification and Document Assembly

The first step is to gather all necessary documentation and perform initial verification checks to ensure the statements are mathematically sound. Assemble the core documents, including the final trial balance, the detailed general ledger, and the prior period’s financial statements. Supporting schedules are also required, such as accounts receivable aging reports, a fixed asset register, and inventory valuation reports.

Once collected, the review begins with the trial balance. The reviewer must confirm that total debit balances equal total credit balances. Each line item on the draft balance sheet and income statement is then traced back to the corresponding balance on the trial balance to confirm no figures were transposed.

A final check involves verifying the continuity of equity accounts. The closing balance of retained earnings from the previous period’s financial statements must match the opening balance for the current period. Any discrepancy signals an error that must be resolved before proceeding.

Balance Sheet Examination Checklist

The balance sheet examination involves verifying its major components to substantiate the existence, completeness, and valuation of the company’s assets, liabilities, and equity. This process scrutinizes the underlying support for each significant balance. The review is organized by the major sections of the statement to ensure comprehensive coverage.

Assets

The asset review begins with cash by agreeing the balance sheet amount to the period-end bank reconciliation and bank statement. Checks outstanding for over 90 to 180 days should be investigated. For accounts receivable, the aging report is examined to identify overdue balances, and the allowance for doubtful accounts is assessed based on collection history. Inventory balances are traced to the valuation report and confirmed against physical count records, and the valuation method, such as LIFO or FIFO, must be consistently applied.

For non-current assets like property, plant, and equipment (PP&E), recent additions are verified by inspecting purchase invoices. The reviewer also confirms depreciation expense was calculated according to company policy. The accumulated depreciation must also be reasonable given the age and nature of the assets.

Liabilities and Equity

The liability examination starts with accounts payable by reviewing the aging report for old invoices or unusual debit balances. Accrued expenses, which are costs incurred but not yet paid, require scrutiny of their underlying calculations. For long-term debt, balances are agreed to loan agreements, and the reviewer must verify that the debt is correctly split between its current and long-term portions.

The equity section is verified by confirming the accuracy of the retained earnings calculation. Any new issuances of stock or capital contributions during the period are traced to legal documents or board meeting minutes to ensure they are properly recorded.

Income Statement and Cash Flow Statement Examination Checklist

The income statement review focuses on proper revenue and expense recognition and identifying unusual fluctuations. For revenue, a sample of sales transactions is tested to ensure it was recognized in the correct period according to ASC 606. This involves tracing sales from the journal back to the invoice, purchase order, and shipping documents.

The analysis of expenses involves comparing current amounts to the budget and prior periods. Significant variances, such as those exceeding 10% or $20,000, should be investigated. For the cost of goods sold, the gross profit margin is calculated and compared to historical trends to spot issues with inventory valuation or pricing.

The statement of cash flows is examined to ensure transactions are classified into the correct categories. The review confirms the statement begins with net income and properly adjusts for non-cash expenses like depreciation. Cash flows from the purchase or sale of equipment must be classified under investing activities, while cash from issuing debt or paying dividends must be classified under financing activities.

Cross-Statement Consistency and Analytical Review

The final phase involves performing analytical procedures and ensuring consistency across the reports. A primary check is to trace the net income figure from the income statement to the statement of retained earnings, where it is a component of the period’s change in equity.

The analysis also confirms the statement of cash flows is linked to the other statements. The ending cash balance on the statement of cash flows must equal the cash balance reported on the period-end balance sheet.

Further analytical procedures provide a high-level view of the company’s performance. Horizontal analysis compares current line items to the prior period to identify trends. Vertical analysis expresses each income statement item as a percentage of total revenue and each balance sheet item as a percentage of total assets. This highlights shifts in the company’s cost structure or asset allocation. Calculating financial ratios, such as the current ratio or debt-to-equity ratio, provides a final quantitative assessment.