A Review Report is a type of assurance service that offers moderate scrutiny of a company’s financial statements. It is substantially less rigorous than an audit but provides limited assurance that there are no material modifications that need to be made to the financial statements for them to be in compliance with applicable accounting standards.
The Essence of a Review Report
Limited Assurance Explained
While an audit offers a high level of assurance and involves comprehensive verification and examination procedures, a review report provides only limited assurance. The primary objective of a review is to determine whether any material modifications should be made to the financial statements to make them conform to the reporting framework.
Distinguishing Features of a Review Report
Types of Review Procedures
- Inquiry and Analytical Procedures: Review engagements largely focus on inquiries of company personnel and analytical procedures. This allows the reviewer to identify and understand the key areas of financial reporting without delving into detailed tests of controls or balances.
- Scope and Depth: Unlike audits, reviews do not require exhaustive evidence gathering. The scope is limited but adequate to raise any red flags that might necessitate further investigation.
Practical and Regulatory Considerations
- Regulations and Standards: Review reports must comply with international and local standards, such as the International Standard on Review Engagements (ISRE) 2400 and Statements on Standards for Accounting and Review Services (SSARS) in the U.S.
Applicability and Examples
When to Opt for a Review Report?
Companies often opt for reviews in situations where a lower level of assurance suffices, such as interim financial reports, certain compliance-related filings, or when cost constraints make a full audit impractical.
Sample Review Report Statements
Here is an example excerpt commonly found in review reports:
“Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with the (applicable financial reporting framework).”
Historical Context
The evolution of review engagements can be traced to increasing demand for mid-tier assurance services. While audits remained the gold standard for rigorous verification, many stakeholders required some level of financial scrutiny without the extensive engagement of a full audit.
Comparison with Related Terms
Audit vs. Review Report
- Audit: Provides a high level of assurance with extensive procedures involving internal control assessments, substantive testing, and proper evidence accumulation.
- Review Report: Offers limited assurance with procedures primarily including inquiry and analytical review.
Compilation vs. Review Report
- Compilation: Involves compiling financial information in a structured manner but without providing any assurance.
- Review Report: Provides limited assurance through analytical procedures and inquiries.
Frequently Asked Questions (FAQs)
What differentiates a review from an audit?
A review is less extensive and provides limited assurance, relying on inquiry and analytical procedures, whereas an audit provides high assurance through detailed testing and evidence collection.
Why would a company choose a review over an audit?
Cost-efficiency and the sufficiency of limited assurance for certain stakeholders make reviews an attractive option compared to audits.
Are review reports as reliable as audits?
Review reports provide only limited assurance, which may suffice for certain needs but do not offer the same level of scrutiny and reliability as audits.
References
- American Institute of CPAs (AICPA). “Statements on Standards for Accounting and Review Services (SSARS) No. 21.”
- International Federation of Accountants (IFAC). “International Standard on Review Engagements (ISRE) 2400.”
Summary
A Review Report serves as a middle ground in financial scrutiny by providing limited assurance through inquiry and analytical procedures. It is ideal for instances where full audits are unnecessary or cost-prohibitive, yet some level of credibility and third-party validation is required. By adhering to established standards, review reports ensure transparency and reliability, thereby fostering trust among stakeholders.
