Review services in accounting provide limited assurance regarding financial data’s reliability. These services are designed to give the Board of Directors and other interested parties some level of confidence in the financial statements, without the requirement of a full audit. Unlike audits, reviews do not involve the CPA conducting examinations in accordance with generally accepted auditing standards (GAAS).
Standards and Governance
Public Companies
For public companies, the AICPA Auditing Standards Board formulates the review standards. These standards set forth the procedures and practices that must be followed, ensuring that the review meets professional and ethical requirements.
Nonpublic Businesses
For nonpublic businesses, the AICPA Accounting and Review Services Committee (ARSC) provides the review standards. The ARSC’s guidelines differ slightly to accommodate the unique requirements of smaller and privately held businesses.
Components of a Limited Review
A limited review primarily consists of:
Inquiry
The CPA engages in dialogue with the company’s management and personnel. This involves asking questions about the company’s financial policies, applied procedures, and internal controls. Common inquiry topics include:
- Accounting principles used by the company
- Procedures for recording, classifying, and summarizing transactions
- Knowledge of existence/actions that may affect the financial statements
Analytical Review
Analytical procedures involve evaluating financial information through analysis of plausible relationships among both financial and non-financial data. This also includes investigating any deviations from expected trends. Key analytical procedures may include:
- Trend analysis
- Ratios comparison
- Historical comparisons
Special Considerations
Scope of Assurance
The assurance level provided by a review is limited, meaning it is significantly lower than that obtained from an audit. The CPA does not provide an opinion on the financial statements’ fairness in all material respects but rather asserts that they are not aware of any material modifications needed.
Cost and Time Efficiency
Due to the reduced scope of procedures, reviews are less costly and time-consuming compared to audits. This efficiency makes reviews an attractive option for smaller entities or those with less complex financial structures.
Historical Context
Reviews emerged as a middle ground between audits and compilations, providing more assurance than a compilation but less than an audit. The standardized process aims to balance cost, assurance, and regulatory requirements.
Applicability
Situations for Reviews
- Small to mid-sized businesses needing periodic financial assurance
- Early-stage entities seeking investor confidence
- Organizations where a full audit may not be feasible
Comparisons with Other Services
Audits
- Highest level of assurance
- Involves extensive testing and verification
Compilations
- No assurance provided
- Primarily assists in preparing financial statements
Related Terms
- Compilation: An accounting service where the CPA assists in the preparation of financial statements without providing assurance.
- Audit: An extensive examination of financial statements, providing a high level of assurance and involving detailed testing and confirmation of data.
FAQs
What is the purpose of a review in accounting?
How does an analytical review differ from substantive testing in an audit?
Are reviews mandatory for all companies?
References
- American Institute of Certified Public Accountants (AICPA). “Statements on Standards for Accounting and Review Services (SSARS).”
- International Federation of Accountants (IFAC). “International Standards on Review Engagements (ISRE).”
Summary
A review provides limited assurance of financial data’s reliability through inquiry and analytical review, governed by AICPA standards for both public and nonpublic entities. While offering less assurance than an audit, it is more rigorous than a compilation, striking a balance between cost and assurance.
This structured approach offers a comprehensive understanding of the topic aligned with SEO best practices and provides valuable insights into the process, standards, and applicability of review services in accounting.
