What Are Financial Statement Review Engagements?

A financial statement review engagement is a professional service performed by an accountant to provide a degree of confidence in a company’s financial statements. Its purpose is to offer limited assurance to external parties, such as lenders or potential investors, that the financial information presented is plausible and free from obvious material misstatements. This engagement serves as a middle ground, offering more scrutiny than a basic compilation of financial data but less than a full-scope audit.

For many small to medium-sized businesses, a review provides a cost-effective solution to enhance the credibility of their financial reporting. It allows stakeholders to gain comfort that the financial statements are not misleading without the expense and time commitment of a detailed audit. The engagement is designed to determine if any information came to the accountant’s attention that would indicate the financial statements need to be materially modified to conform with the applicable accounting framework.

Key Characteristics of a Review

A review engagement is defined by the concept of “limited assurance.” This means the accountant performs procedures that are substantially narrower in scope than those required for an audit. The objective is not to express an opinion on the fairness of the financial statements, but to state whether the accountant is aware of any necessary material modifications, which is known as providing “negative assurance.”

The core of a review consists of two types of procedures: inquiry and analytical procedures. Inquiry involves the accountant asking questions of the company’s management and other personnel concerning financial and accounting matters. These discussions cover topics such as the accounting principles used, actions taken at board meetings, and any significant transactions that have occurred.

Analytical procedures involve the evaluation of financial information by analyzing plausible relationships among both financial and non-financial data. This means the accountant will compare current financial statement balances to prior periods, budgets, or forecasts. They will also analyze ratios and trends to identify any unusual fluctuations or unexpected relationships that might indicate potential misstatements.

Information Required from Management

For an accountant to perform a review engagement, management must provide a complete and accurate set of financial information. This begins with the primary financial statements, which include the balance sheet, income statement, statement of cash flows, and statement of retained earnings. Preparation of these documents in accordance with a recognized accounting framework, such as Generally Accepted Accounting Principles (GAAP), is management’s responsibility.

Beyond the primary statements, the accountant will require the underlying trial balance from the company’s accounting system. The trial balance lists every general ledger account and its balance, providing the detailed data that aggregates into the financial statements. Supporting schedules and reconciliations are also necessary to substantiate the balances reported on the financial statements.

Commonly requested supporting documents include an accounts receivable aging schedule, an inventory listing, and a fixed asset schedule showing additions, disposals, and depreciation. Bank statements for all company accounts, along with the corresponding bank reconciliations, are also needed to verify cash balances.

A management representation letter is a required part of the engagement. In this signed letter from management to the accountant, management makes specific written assertions. These include confirming their responsibility for the financial statements, stating that all financial records have been made available, and affirming that they are not aware of any fraud or material errors.

The Review Engagement Process

Once the accountant has received the necessary financial statements and supporting documentation, the review engagement process begins. The process is systematic and must be documented to support the work performed and the conclusions reached.

The accountant starts by gaining an understanding of the client’s industry, business operations, and the accounting principles common to that industry. This context is important for identifying areas where material misstatements could be more likely to occur. They then perform analytical procedures, which might involve comparing the company’s gross margin percentage for the current quarter to the same quarter in the previous year.

Inquiries are directed toward individuals within the company who have responsibility for financial and accounting matters. For instance, the accountant might ask management about any changes in business activities, the status of any pending litigation, or whether there have been any significant events subsequent to the balance sheet date.

Throughout the process, the accountant documents all procedures and evidence in workpapers, which demonstrate compliance with professional standards like the Statements on Standards for Accounting and Review Services (SSARS). If the accountant identifies information that appears to be incorrect or incomplete, they will communicate these findings to management and may request adjustments to the financial statements.

The Accountant’s Review Report

The final deliverable of a review engagement is the accountant’s review report. This formal document communicates the accountant’s conclusion to the users of the financial statements and has a standardized structure to avoid any misunderstanding about the scope of the work performed.

The report begins by identifying the financial statements that have been reviewed and the period they cover. A following paragraph outlines the accountant’s responsibility to conduct the review in accordance with SSARS. This section briefly describes what a review consists of, emphasizing that the procedures are limited to analytical procedures and inquiries and that the scope is substantially less than an audit.

The concluding paragraph contains the limited assurance statement. The wording typically states, “Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with the accounting principles generally accepted in the United States of America.” This negative assurance informs the reader that nothing came to the accountant’s attention to suggest the statements are materially misstated.