What Is a Reviewed Financial Statement? Scope & Relevance

A reviewed financial statement (FS) is a set of financial statements that a certified public accountant (CPA) has reviewed. In a review, the CPA only performs analytical procedures and inquiries to check whether the FS has no significant modifications and is compliant with the US GAAP. Unlike an audit, reviews aren’t extensive and detailed. They also don’t express opinions about the FS, making reviews provide only limited assurance—much less than an audit.

Click to view a sample of CPA’s review report

Independent Accountant’s Review Report

To the Board of Directors [or Management, Owner, etc.] of [Company Name]:

Introduction

I have reviewed the accompanying financial statements of [Company Name], which comprise the balance sheet as of [Date], and the related statements of income, retained earnings, and cash flows for the [year/period] then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I do not express such an opinion.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with [applicable financial reporting framework, e.g., accounting principles generally accepted in the United States of America]; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Accountant’s Responsibility

My responsibility is to conduct the review in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. These standards require me to perform procedures to obtain limited assurance as a basis for reporting whether I am aware of any material modifications that should be made to the financial statements for them to be in accordance with [applicable financial reporting framework].

I believe that the results of my procedures provide a reasonable basis for my conclusion.

Accountant’s Conclusion

Based on my review, I am not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with [applicable financial reporting framework, e.g., accounting principles generally accepted in the United States of America].

[Signature of the Accountant]
[Accountant’s Firm Name]
[City, State]
[Date of the Report]

Scope of a Review

A CPA who performs an FS review usually conducts two procedures: analytical procedures and inquiries. After a review, the CPA gives a conclusion about the FS. The conclusion of a review only provides limited assurance, whereas an opinion in an audit offers a higher level of assurance.

Analytical Procedures

Analytical procedures involve the analysis of plausible relationships among financial and non-financial data. The CPA will analyze financial data, look for unusual fluctuations, and relate financial information with non-financial data gathered during the review. When designing analytical procedures, the CPA must address the following:

• All material items in the FS
• Areas of the FS where the CPA believes to be at a higher risk of material misstatement (e.g., revenue recognition)

The analytical procedures during a review will be focused on:

• Comparing with past financials: The reviewer examines the current financial statements in comparison with the previous year’s figures, taking into account any changes in the business or specific transactions that may have impacted the results.
• Checking quantitative and qualitative data relationships: The reviewer looks at the relationships between financial data and, when relevant, non-financial data, ensuring that these connections are logical and consistent with the overall financial picture.
• Matching numbers to expectations: The reviewer compares the current financial figures or ratios to their expectations, which are based on their understanding of the business and industry, to identify any discrepancies that may need further investigation.
• Reviewing detailed revenue data: The reviewer analyzes detailed revenue data, if applicable, to ensure that the revenue figures are consistent with expectations and accurately reflect the business’s financial performance.

Inquiries

The CPA will make inquiries to management responsible for financial and accounting matters, aligning these inquiries with the findings from analytical procedures. Even if the CPA found no major findings or inconsistencies during analytical procedures, they will still perform inquiries as part of the review procedure.

During inquiries, the CPA will ask about the following:

• Preparation and presentation of financial statements: The CPA checks if the financial statements have been correctly prepared and fairly presented according to the applicable rules, including how management determined that important financial estimates are reasonable.
• Related parties and transactions: The CPA identifies any related parties involved in transactions and understands the purpose of these transactions.
• Significant events and transactions: The CPA reviews whether there have been any major, unusual, or complex transactions or events that have affected the financial statements, such as:
• • Significant changes in the business operations or activities.
  • Major changes to contract terms that impact the financial statements, including financing or debt agreements.
  • Large adjustments or journal entries made to the financial statements.
  • Important transactions that occurred near the end of the reporting period.
• Previous misstatements: The CPA checks the status of any mistakes from prior reviews that haven’t been corrected and whether they were adjusted in the current period.
• Fraud and legal compliance: The CPA asks about any known or suspected fraud or legal violations involving senior management that could affect the financial statements, including issues with tax and pension laws.
• Subsequent events: The CPA assesses whether management has identified and addressed any significant events that occurred after the financial statements were prepared, which might require adjustments or additional disclosures.
• Going concern: The CPA examines management’s assessment of whether the business can continue operating in the near future and looks for any conditions that might raise doubts about its viability.
• Material commitments and transactions: The CPA reviews any significant commitments, obligations, or contingencies that have affected, or could affect, the financial statements, including non-monetary transactions.
• Regulatory communications: The CPA checks for any communications from regulatory agencies that might impact the financial statements.
• Litigation and claims: The CPA considers any ongoing or potential legal disputes, claims, or assessments that existed at the date of the balance sheet or arose afterward.

Relevance for Small Businesses

For a small business, a financial statement review can be more cost-effective than an audit. It can also provide small business owners additional insights into how to improve business processes and financial reporting objectives. Though reviewed financial statements only provide limited assurance, this kind of assurance is better than nothing.

Here are some reasons why FS reviews can be helpful for small businesses:

• Ensuring credible and reliable FS: Reviews can provide more credibility to the FS, which enhances its reliability to creditors and other stakeholders.
• Seeing potential red flags early on: When the CPA detects inconsistencies during the review, they can alert you of these right away so that you can take the appropriate corrective actions needed. Moreover, it can be a good opportunity to revise existing processes to prevent inconsistencies.
• Meeting regulatory compliance: It’s possible that the CPA may detect minor or major incompliances with the US GAAP or other regulatory requirements during a review. After the review, you can correct or undo these violations to prevent you from being liable to authorities.
• Keeping peace of mind: When you know your business is in order and following all the rules, you can sleep easy without worrying about the IRS or the Feds showing up with questions.

Independence Requirements

Now that you understand why a review can be relevant for small businesses, you might be wondering if your in-house accountant can handle it. You may also be thinking about asking a relative or friend who’s a CPA to do the review for you.

In this section, we’ll dive into why independence is crucial for a CPA to conduct a review and go over some examples to help you figure out how to choose the right CPA for the job.

Types of Independence for CPAs Providing Assurance

If you revisit the sample report above, the title of the report says, “Independent.” Independence is important for assurance services. Without independence, there would be no credibility and reliability since the CPA’s conclusion might be biased toward the interests of the company.

Here are the types of independence that a CPA must have to conduct a review:

1. Independence of fact refers to the CPA’s state of mind and their ability to be objective at all times. It means that the CPA can still make a conclusion without being influenced by biases, financial interests, and relationships.
2. Independence of appearance refers to how others would interpret the CPA’s association with their client. Even if the CPA can be objective, others may still doubt their impartiality in making a conclusion.

Before conducting an FS review, the CPA must be independent in both fact and appearance.

Sample Scenarios

Financial Statement Review vs Audit

Reviews and audits are examples of attestation services that you can get from a CPA firm. However, many small business owners don’t understand the difference between these two types of services. To help you understand, we’ve organized the concepts of reviews and audits in a table to better compare them.

Keep reading: What Is an Audited Financial Statement?

Frequently Asked Questions (FAQs)

Bottom Line

A reviewed financial statement provides a limited level of assurance to the readers, which can be enough for internal decision-making. Having your FS reviewed is one way of ensuring that you’re complying with the US GAAP, state laws, and federal regulations affecting your business.