Financial Statement Review
A financial statement review is a service provided by a certified public accountant (CPA) or an accounting firm to perform analytical procedures and inquiries related to a company’s financial statements. The purpose of a review is to provide a level of assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework.
A review is less extensive than an audit and provides a lower level of assurance. In an audit, the auditor obtains a high level of assurance through a more detailed examination that includes, among other things, confirmation with third parties, physical inspection and observation, and testing of selected transactions by examining supporting documents.
During a financial statement review, the CPA performs primarily the following:
- Analytical Procedures: This involves comparing the financial statements to other data, such as internal records, comparable data from the industry, or expected results based on knowledge of the client’s business.
- Inquiries: This involves asking the management team and others within the organization about financial statement-related items, such as the appropriateness of accounting policies, consistency of accounting practices, and significant transactions near the end of the reporting period.
A review results in a report by the CPA providing “limited assurance” that no material changes are needed in the financial statements. This level of assurance, though less than that of an audit, can be satisfactory for many businesses, especially small to medium-sized businesses that don’t need a full audit.
It’s important to note that a review doesn’t involve the CPA obtaining an understanding of internal control, assessing fraud risk, testing accounting records, or other procedures usually performed in an audit. Therefore, a review does not provide a basis for expressing an opinion on the fairness of the financial statements.
Example of a Financial Statement Review
Imagine there is a small technology company called “Techie Inc.” that has been in operation for a few years. Techie Inc. isn’t a publicly-traded company and has a relatively simple business structure, so it doesn’t require a full audit of its financial statements.
However, to assure its lenders and investors about the reliability of its financial information, Techie Inc. engages a certified public accountant (CPA), John Doe, to conduct a review of its financial statements for the fiscal year ending 2023.
Here’s how John Doe would proceed:
- Understand the Business: John first gains a basic understanding of the business, including its operations, its industry, and the accounting principles and practices that are generally used in that industry.
- Perform Analytical Procedures: John compares the financial statements of Techie Inc. with its prior year financial statements to identify any significant changes or trends. For example, he notices that the company’s revenues increased by 30%, but its cost of goods sold only increased by 5%. He might also compare the company’s gross margin and profit margin with industry averages to see if they are in line with expectations.
- Make Inquiries: John asks the management of Techie Inc. about various aspects of the financial statements. Using the example above, he would ask management to explain the reason for the significant increase in revenues and the smaller increase in cost of goods sold. Management might explain that the company introduced a new high-margin product line, which led to higher revenues and relatively lower cost of goods sold.
After conducting the review, if John finds no material misstatements or inconsistencies, he will issue a review report that provides limited assurance that no material modifications are necessary for the financial statements to be in conformity with the applicable financial reporting framework.
Please note this is a simplified example. The actual process would likely be more complex and detailed, based on the company’s specific circumstances.