A financial review is a restricted assurance audit of a company’s financial records by a CPA that reports on the veracity of its financial statements.
A review, as opposed to an audit, has a more constrained scope and nevertheless evaluates a company’s records while focusing only on analytical techniques and management evaluation.
As a result, an audit offers a decent level of assurance whereas a financial review offers a restricted one.
Only the plausibility of a company’s financial statements, as well as whether or not they adhere to generally accepted accounting rules and are free of substantial misstatements, can be determined by the results of a review.
It is a frequent misconception that a review might be a simple first step toward a subsequent year’s audit, but this is not always the case. Instead, a review has its own set of advantages.
A second, impartial pair of eyes is brought to bear on the financial accounts of a company when they are examined. This can contribute to boosting security and confidence, which is comforting to a company’s board, lenders, and investors.
Many business owners instead opt to have a review since they would still like a detailed investigation of their financial records but are not compelled to have an audit. They will be able to save time and money as a result.
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How Expensive is a Financial Statement Review?
The review costs more than a compilation, but less than an audit. It is chosen by companies whose creditors and lenders will allow them to utilize this strategy, sparing them the expense of a complete audit.
Procedures Used in a Financial Statement Review
The accountant conducts the processes required during a financial statement review to give a reasonable basis for getting a limited assurance that no major modifications are required to bring the financial statements into compliance with the relevant financial reporting framework. In sectors where there are higher risks of misstatement, these processes are more extensively concentrated. A review might reasonably involve the following sorts of procedures:
- 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 entity’s financial statements in prior periods
There are also a number of review steps that can be utilized in specific areas, such as:
- Cash. Are cash accounts being reconciled? Have checks written but not mailed been classified as liabilities? Is there a reconciliation of intercompany transfers?
- Receivables. Is there an adequate allowance for doubtful accounts? Are any receivables pledged, discounted, or factored? Are there any non-current receivables?
- Inventory. Are physical inventory counts performed? Were consigned goods considered during the inventory count? What cost elements are included in the cost of inventory?
- Investments. How are fair values determined for investments? How are gains and losses recorded following the disposal of an investment? How do you calculate investment income?
- Fixed assets. How are gains and losses on the disposal of fixed assets recorded? What are the criteria for capitalizing expenditures? What depreciation methods are used?
- Intangible assets. What types of assets are recorded as intangible assets? Is amortization being appropriately applied? Have impairment losses been recognized?
- Notes payable and accrued expenses. Are there sufficient expense accruals? Are loans properly classified?
- Long-term liabilities. Are the terms of debt agreements properly disclosed? Is the entity in compliance with any loan covenants? Are loans properly classified as short-term or long-term?
- Contingencies and commitments. Are there guarantees to which the entity has committed itself? Are there any material contractual obligations? Are there liabilities for environmental remediation?
- Equity. What classes of stock have been authorized? What is the par value of each class of stock? Have stock options been properly measured and disclosed in the financial statements?
- Revenue and expenses. What is the revenue recognition policy? Are expenses recorded in the correct reporting period? Have the results of discontinued operations been properly reported in the financial statements?
A sample of the review tasks that an accountant could perform is shown in the list above.
If the accountant thinks the financial statements are significantly misstated, he should take extra steps to get a limited assurance that the financial statements don’t need to be materially modified. The accountant must decide whether to disclose the problem in the report that goes along with the financial statements or to stop the examination if the statements are significantly misstated.