Review Engagements
Review engagements pertain to the field of accounting and auditing. They refer to the services where an accountant or audit firm is engaged to review an organization’s financial statements and provide a report on them. However, it’s crucial to understand that a review engagement does not offer the same level of assurance as an audit.
Here’s a breakdown of review engagements:
- Nature of the Service:
- In a review engagement, the primary procedures involve inquiries of company personnel and analytical procedures applied to financial data. The aim is to determine whether any significant changes need to be made to the financial statements for them to be in line with the applicable financial reporting framework.
- A review offers limited assurance, which means the accountant is not aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework. It’s a level of assurance that is less than that of an audit but more than a compilation.
- Report:
- At the end of a review engagement, the accountant or audit firm issues a review report. This report includes a conclusion about whether anything has come to the accountant’s attention that causes them to believe the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.
- It’s important to note that a review report does not express an opinion on the financial statements (as is the case with an audit report).
- When is it Used?:
- Review engagements are commonly used when a full audit is not required, but some level of assurance is still desired. This might be the case for smaller companies, subsidiaries of larger entities, or when stipulated by certain creditors or regulatory bodies.
- Benefits:
- Reviews are typically less extensive and less costly than audits. They’re a viable choice for entities that do not need a full audit but still wish to provide stakeholders with some level of assurance about their financial statements.
- Limitations:
- Since review engagements offer limited assurance, they do not delve as deeply into the company’s financial activities as an audit would. Therefore, there’s a higher w that material misstatements might not be detected in a review compared to an audit.
In summary, review engagements are a type of service in the accounting world where financial statements are reviewed (rather than audited) to offer limited assurance about their appropriateness.
Example of Review Engagements
ABC Tech Ltd., a medium-sized tech startup, is in its fifth year of operation. They’ve recently secured a large loan from XYZ Bank. As part of the loan agreement, XYZ Bank requires annual financial statements with some form of assurance, but they do not insist on a full audit given the size and stage of ABC Tech Ltd.
ABC Tech Ltd. decides to opt for a review engagement instead of an audit, given its lesser cost and the bank’s requirements.
Review Process:
- ABC Tech Ltd. hires PQR Accounting Firm to conduct the review.
- PQR Accounting Firm starts the review by understanding ABC Tech Ltd.’s business, its accounting systems, and processes. They conduct inquiries with ABC Tech’s finance personnel about accounting policies, financial statement disclosures, and any significant transactions in the year.
- The accountants perform analytical procedures, comparing current year amounts to prior years, budgets, and industry standards. For instance, if ABC Tech’s revenues surged by 80% compared to the last year but the industry average was 10%, PQR would inquire and analyze the reasons for this unusual growth.
- PQR Accounting Firm reviews significant accounting estimates made by management, like potential doubtful accounts or warranty provisions.
Review Report:
After completing the review, PQR Accounting Firm issues the following report:
To the Shareholders of ABC Tech Ltd.,
We have reviewed the accompanying financial statements of ABC Tech Ltd., which comprise the balance sheet as of December 31, 2023, and the related statements of income, changes in shareholders’ equity, and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
A review of financial statements consists primarily of inquiries of company personnel and analytical procedures applied to the financial data . It is substantially less in scope than an audit conducted in accordance with Generally Accepted Auditing Standards (GAAS) and, therefore, does not enable us to express an opinion on these financial statements. Accordingly, we do not express an opinion.
Based on our review, nothing has come to our attention that causes us to believe that these financial statements do not present fairly, in all material respects, the financial position of ABC Tech Ltd. as of December 31, 2023, in accordance with Generally Accepted Accounting Principles (GAAP) .
Sincerely,
PQR Accounting Firm
In this scenario, ABC Tech Ltd. meets the bank’s requirements by providing financial statements with some assurance through the review engagement. The report gives the bank some confidence in the financial statements, albeit with the understanding that it doesn’t offer the same assurance level as an audit.
