In a review, inquiries and analytical procedures are applied to private entities financial statements. A private entity may engage a CPA to perform a review of its financial statements and issue a report that provides limited assurance that material changes to the financial statements are not necessary. With respect to reliability and assurance, a review falls between a compilation, which provides no assurance, and the more extensive assurance of an audit.
Before a review, the CPA may have to compile the financial statements; however, in all cases, the financial statements are management’s statements, not the CPA’s. Management must have a sufficient understanding of the financial statements to assume responsibility for them. Two other factors differentiate a review from a compilation — the CPA must remain independent of the client during a review, and all appropriate footnotes must be included in the reviewed statements.
Here’s what a review entails:
The CPA obtains a working knowledge of the industry in which the entity operates and acquires information on key aspects of the organization, including operating methods, products and services, and material transactions with related parties.
The CPA will then make inquiries concerning such financial statement-related matters as accounting principles and practices, recordkeeping practices, accounting policies, actions of the board of directors, and changes in business activities. Then the CPA will apply analytical procedures designed to identify unusual items or trends in the financial statements that may need explanation. Essentially, a review is designed to see whether the financial statements “make sense” without applying audit-type tests.
Keep in mind that during a review, a CPA does not confirm balances with banks or creditors, observe inventory counting, or test selected transactions by examining supporting documents. However, in many instances, a review—with its limited assurance —may be adequate for a business or its creditors. If more assurance is necessary, the organization may need to engage a CPA to perform an audit.
Here is an illustrative review report:
Accountant’s Review Report
Stockholders and Board of Directors
We have reviewed the accompanying balance sheet of XYZ Company as of December 31, 201X, and the related statements of income, retained earnings, and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of XYZ Company.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
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 conformity with generally accepted accounting principles.
January 31, 201X