What is a Review?
A review is another form of financial statement preparation service provided by a certified public accountant. A review is a step up from a compilation but falls short of an audit. As such, reviewed financial statements provide a higher level of assurance in that the accountant certifies that nothing came to their attention that would cause the financial statements to be misleading. In order to come to this conclusion, the accountant obtains financial data from the organization, performs analytical review procedures and makes inquiries of management regarding financial transactions.
In connection with the review, accountants are not required to evaluate or study the system internal controls of an organization or verify financial data with third parties or make a physical inspection of inventory and assets.
A review is generally more expensive than a compilation but costs less than an audit. It is often considered as the preferred option for organizations seeking bank financing or private investment capital. Unlike an audit, a review provides limited assurance and is substantially narrower in scope. The accountant does not investigate underlying problems during a review such as the strength of internal controls or the risk of fraud within the organization. It also does not include the testing of procedures or accounting records, which would usually be conducted in an audit.
How Does The Accountant Conduct A Review?
The accountant, when conducting a review, follows the Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. First, the accountant obtains and analyzes financial statements from different years. Second, he compares financial statements with forecasted or predicted data for comparable periods. Lastly, he establishes expectations based on relationships among the financial statements compared to industry standards or historical trends.
These procedures are further categorized into the following stages:
1. Preliminary Analytical Review
The first stage is the preliminary analytical review, where the accountant obtains an understanding of the organization’s business, its environment, and overall financial performance over the course of the current and prior years.
2. Substantive Analytical Procedures
The second stage involves substantive analytical procedures. In this stage, the accountant uses non-financial data and predictive tests to assess the reasonableness of financial data. These analytical procedures form the basis for further inquiries of management and the possible identification of misstatements in the financial statements.
3. Final Analytical Procedures
The third stage is the final analytical review, where analytical procedures are conducted as a final overall review. This is done at the end of the entire process in order to determine if the financial statements are consistent with the understanding that the accountant gained during the preliminary and substantive analytical procedures.
Prior to issuing the financial statements, the accountant must obtain written representations from the management of the organization. With these representations, management must affirm that they have provided all relevant information impacting the financial statements as well as assert their responsibility for the financial statements and disclosures.