What Is a Financial Statement Review Report?

A financial statement review is a service performed by a Certified Public Accountant (CPA) that provides limited assurance to outside parties about a company’s financial statements. The CPA evaluates whether the statements are consistent with a financial reporting framework, such as Generally Accepted Accounting Principles (GAAP). This service is often sought by companies that need to provide financial information to third parties, like lenders or investors, but are not required to undergo a full audit.

The “limited assurance” means the CPA is stating that, based on their work, they are not aware of any major changes needed for the statements to be in compliance with the accounting framework. This differs from an audit, which provides a higher level of assurance through a more in-depth examination. A review offers a middle ground, providing more confidence than a basic compilation but involving a less extensive process than a full audit.

The Accountant’s Review Procedures

An accountant’s work during a review engagement is centered on two primary activities: analytical procedures and inquiry. These methods are designed to identify unusual items or trends in the financial statements that may warrant further explanation. The scope of these procedures is narrower than those performed in an audit, which is why a review provides only limited assurance.

Analytical procedures involve comparing financial data to identify unexpected relationships and patterns. For instance, an accountant might compare a company’s revenue from the current year to the previous year to spot any significant, unexplained fluctuations. Another procedure is to analyze the gross margin percentage over several periods, as a sudden change could indicate issues with either sales figures or the cost of goods sold.

The other component of a review is inquiry. This involves the accountant asking targeted questions of the company’s management about financial and accounting matters. These questions are designed to understand the company’s accounting practices, significant transactions, and any events that could affect the financial statements. For example, the accountant might inquire about how the company accounts for inventory, its process for recording revenue, or the details behind a significant legal contingency.

A review does not include testing the company’s internal control systems to see if they are effective at preventing or detecting errors. The accountant also does not perform procedures to verify information with external third parties, such as confirming account balances with a bank. Furthermore, a review does not involve the physical inspection of assets, like observing an inventory count.

Required Information and Management Responsibilities

For a CPA to perform a review, management must provide a complete set of financial statements, which must be accompanied by any necessary footnotes. This set includes:

• The balance sheet, which shows the company’s financial position at a specific point in time.
• The income statement, which details operational results over a period.
• The statement of cash flows, tracking the movement of cash.
• The statement of retained earnings.

Beyond the primary statements, the accountant will request supporting schedules and documentation, such as an accounts receivable aging report or a detailed listing of inventory. Management must provide access to all information the accountant deems necessary to complete their inquiries and analytical procedures.

Management retains ultimate responsibility for the financial statements. This responsibility includes designing, implementing, and maintaining internal controls relevant to the preparation of financial statements that are free from material misstatement.

Management must also formally acknowledge its responsibilities in writing through a management representation letter provided to the accountant. In this letter, management confirms that it has provided all relevant information, that the financial statements are accurate to the best of its knowledge, and that it has disclosed any known instances of fraud or noncompliance with laws and regulations.

Anatomy of the Final Report

The final deliverable of a review engagement is the accountant’s review report, a formal document with a specific structure that communicates the nature of the work performed and the conclusion reached.

The report’s title must include the word “Independent” to signify that the CPA has no conflicting interests with the company being reviewed. The report is then addressed to the appropriate party, such as the board of directors or stockholders.

The report contains a paragraph titled “Management’s Responsibility for the Financial Statements.” This section explicitly states that management is responsible for preparing the financial statements in accordance with the accounting framework and for maintaining internal controls.

The “Accountant’s Responsibility” section outlines the accountant’s role. It states that the review was conducted in accordance with Statements on Standards for Accounting and Review Services. This section also clarifies that the scope is substantially less than an audit and that no audit opinion is expressed.

The conclusion paragraph provides the accountant’s limited assurance. The standard language 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 phrasing, known as negative assurance, does not positively assert that the statements are correct, but rather that nothing came to the accountant’s attention that would indicate they are materially misstated.

The Engagement Process

The financial statement review process begins with a formal agreement and ends with the delivery of the final report. The first step is creating an engagement letter, which serves as the contract between the client and the CPA. The letter outlines the objective and scope of the review, the responsibilities of both management and the accountant, the engagement’s limitations, and the service fees.

Once the engagement letter is signed, the fieldwork phase begins, where the accountant executes the review procedures. This stage is interactive, with the accountant communicating with management to request documents, ask clarifying questions about transactions, and discuss any unusual findings from their analysis.

After completing the fieldwork, the accountant evaluates the evidence gathered to form a conclusion. The final step is the issuance of the signed financial statement review report to the client. Management should read the report carefully to understand the accountant’s conclusion.