A review engagement provides a middle ground between a compilation (no assurance) and an audit (reasonable assurance). The CPA performs limited procedures to provide limited assurance on the financial statements.
What Is a Review?
In a review, the CPA:
- Does: Perform analytical procedures on financial data
- Does: Make inquiries of management about accounting practices and financial data
- Does: Provide limited assurance (negative assurance)
- Does NOT: Test transactions, confirm balances, or observe inventory
- Does NOT: Provide reasonable assurance (that's an audit)
Review Procedures
Analytical Procedures
- Compare current period to prior periods
- Analyze relationships between financial statement elements
- Compare to industry benchmarks
- Investigate unusual fluctuations or relationships
Inquiries of Management
- Accounting principles and practices used
- Procedures for recording, classifying, and summarizing transactions
- Actions taken at meetings of shareholders, board, or committees
- Subsequent events
- Fraud or suspected fraud
The Review Report
The review report provides "limited assurance" expressed negatively:
"Based on my (our) review, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements..."
This is notably different from an audit opinion, which provides positive assurance.
When Reviews Are Used
- Private companies needing more than a compilation but not requiring an audit
- Bank or lender covenants specifying review-level service
- Interim financial statements for public companies
- Franchise agreements requiring financial oversight
- Private equity or investor requirements
Standards
SSARS (Private Companies)
- AR-C Section 90: Review of Financial Statements
- Issued by AICPA's ARSC Committee
SAS (Interim Reviews for Public Companies)
- AU-C Section 930: Interim Financial Information
- More extensive procedures due to public company context
Review vs. Audit: Cost and Value
| Factor | Review | Audit |
|---|---|---|
| Fee | 40-60% of audit cost | Full audit fee |
| Time | Significantly less | Extensive fieldwork |
| Assurance | Limited (negative) | Reasonable (positive) |
| Procedures | Analytics + inquiry | Full testing program |
| Value to users | Moderate confidence | High confidence |
CPA Firm Considerations
Reviews require:
- Independent CPA (same as audit independence)
- Understanding of the industry
- Professional skepticism
- Proper engagement documentation