What Is a Reviewed Financial Statement?

Financial statements serve as a report card for any business, providing a snapshot of its financial health and performance. These documents, such as the balance sheet, income statement, and cash flow statement, offer insights into a company’s assets, liabilities, revenues, and expenses. Stakeholders, including business owners, investors, and lenders, rely on this information to make informed decisions. The reliability of these financial reports is important, leading to a need for different levels of assurance from independent professionals. Business needs and external requirements determine the examination level applied to these statements.

Defining Reviewed Financial Statements

A reviewed financial statement is an engagement by an independent certified public accountant (CPA) to provide limited assurance on a company’s financial information. Its objective is to determine if material modifications are needed for the statements to conform with the applicable financial reporting framework, such as Generally Accepted Accounting Principles (GAAP). This level of assurance is less extensive than an audit but offers more credibility than a simple compilation.

Limited assurance means the CPA performs inquiries and analytical procedures to identify obvious material misstatements, rather than a detailed examination. The accountant applies their understanding of the entity’s industry and accounting principles to assess the financial statements’ plausibility. This engagement adheres to professional standards set by the American Institute of Certified Public Accountants (AICPA) through its Statements on Standards for Accounting and Review Services (SSARS), which guides CPAs performing preparation, compilation, and review engagements for nonpublic entities.

Distinguishing From Other Engagements

Reviewed financial statements differ from other engagements, primarily compilations and audits. Each service offers distinct levels of assurance, procedures, cost, and reporting, allowing businesses to choose based on their needs and external requirements.

A compilation is the most basic service, where a CPA assists management in presenting financial information without assurance on accuracy. The accountant does not perform verification procedures, simply putting client information into a standard format. This service is the least expensive and quickest, often used for internal management or minimal external assurance. The report includes a disclaimer stating no assurance is provided.

An audit provides the highest level of assurance a CPA can offer. It involves a comprehensive examination of a company’s financial records, internal controls, and supporting documentation. The auditor performs extensive procedures, including testing transactions, confirming balances, and evaluating internal controls, to express an opinion on whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. Audits are the most time-consuming and expensive due to extensive work. The auditor issues an opinion providing “reasonable assurance” about freedom from material misstatement.

A review engagement sits between a compilation and an audit, offering “limited assurance.” The procedures are less extensive than an audit but more involved than a compilation. Reviews are less costly and time-consuming than audits. The report states the accountant is not aware of material modifications needed, rather than expressing a positive opinion. This makes reviewed financial statements a balanced option, providing moderate comfort without the full scope and cost of an audit.

The Review Process

The process involves specific procedures and responsibilities for the accountant and management. The accountant’s methodical approach aims to gain sufficient understanding for limited assurance. This begins with understanding the entity’s industry, operations, and accounting practices.

A core component involves inquiries of management and personnel regarding financial statement aspects. These inquiries cover accounting policies, significant transactions, and subsequent events impacting the statements. The accountant also performs analytical procedures, comparing current financial data with prior periods, anticipated results, and industry data. This analysis helps identify unusual fluctuations or inconsistent relationships that may indicate misstatement.

Management is responsible for preparing and presenting financial statements in accordance with the applicable financial reporting framework. This includes designing, implementing, and maintaining internal controls relevant to preparing financial statements free from material misstatement, whether due to fraud or error. Management must also provide all relevant financial records and information. A management representation letter is obtained, confirming management’s responsibility for the financial statements and information completeness. If material misstatements are identified, management corrects them, and the accountant reviews these adjustments.

Typical Use Cases for Reviewed Financial Statements

Reviewed financial statements serve various purposes for businesses, offering suitable assurance when a full audit is not mandated or economically feasible.

One common use is for businesses seeking loans from banks or financial institutions. Lenders often require assurance to assess creditworthiness and reduce risk, especially for small to medium-sized businesses. A review provides independent confirmation of financial data, enhancing credibility and potentially leading to more favorable loan terms.

Another application is attracting investors, particularly for private companies seeking capital. While public companies often require audited statements, private investors may be satisfied with reviewed statements, which offer reasonable assurance without the added cost and time of an audit. This allows investors to gain confidence in the financial data, aiding investment decisions. The independent review lends credibility, demonstrating a commitment to transparency.

Reviewed financial statements also meet specific compliance requirements. Regulatory bodies or contractual agreements may stipulate a review rather than a compilation or audit. For instance, some government contracts, grant applications, or industry regulations might require a review for financial accountability. While not as stringent as an audit, the review satisfies the need for independent oversight.

Finally, internal management can benefit from reviewed financial statements. The process of an independent accountant performing inquiries and analytical procedures can provide management with higher confidence in their financial reporting systems and data. This internal benefit stems from external scrutiny, which can highlight areas for improvement in financial processes and controls.