Review definition

What is a Review in Accounting?

A review is a reduced form of an audit that provides a reduced level of assurance regarding an entity's financial statements. The auditor who conducts a review must perform analytical procedures and make inquiries of the client concerning the financial statements and accompanying footnote disclosures. Based on these investigations, the auditor can provide limited assurance that the financial statements do not need any material modifications. When a firm is publicly-held, it must obtain a review of its quarterly financial statements, except for the fourth quarter (for which a full audit is required).

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The Difference Between a Review and an Audit

The main difference between a review and an audit is that the review does not involve any tests of balances, which are a core part of the steps involved in an audit. This means there are no independent verifications of the client's account balances, for which an auditor would use confirmations. The review also does not involve an examination of the client's system of controls, nor is there any examination for the existence of fraud.

A review is significantly less expensive than an audit, so businesses have a financial incentive to have their financial statements reviewed. However, the parties receiving their financial statements (typically lenders, creditors, and investors) want to be assured that the statements are correct, and so may insist on an audit. If a firm has a review performed and then elects to switch to an audit in the following year, it may find (depending on the circumstances) that the auditors will need to engage in audit activities for the prior year, even though a review was already conducted for that period.

Advantages of a Review

There are several advantages associated with conducting a review, which are as follows:

  • Increased credibility. A review provides stakeholders, such as investors, lenders, or regulatory authorities, with assurance that the financial statements are free from obvious errors or misstatements.

  • Lower cost. A review is less comprehensive than an audit, requiring fewer procedures and less time, making it more affordable for small to mid-sized businesses.

  • Some compliance with regulations. Reviews often satisfy legal or contractual requirements for financial reporting without the need for a full audit.

  • Identifies issues. Reviews can detect significant misstatements or errors in financial statements that might otherwise go unnoticed. Suggestions made during the review can help improve accounting practices and compliance with accounting standards.

  • Identifies risks. While less thorough than an audit, a review still provides an extra layer of scrutiny to financial statements, reducing the risk of misrepresentation. It helps in identifying potential financial issues or irregularities before they escalate.

  • Flexibility and scalability. A review is less intrusive and can be scaled up or down depending on the business's complexity and financial reporting requirements.

By providing a balanced level of scrutiny, reviews are particularly advantageous for organizations that seek assurance beyond basic financial statement preparation but do not require the depth of an audit.