Organisations resort to periodic audits to verify the condition of their financial health and operations. However, not all organisations can afford to bear the expenses of periodic audits. Nor do they require a thorough examination like an audit all the time.
This is where the role of a review comes into play. A review is a form of assurance engagement that formally examines an organisation’s financial statements.
The procedures involved are fewer than those of audits, and the level of assurance is negative or limited instead of reasonable.
Besides that, the opinions rendered in a review regarding the plausibility of some financial statements will be somewhat like “so far, no issues have come to our attention” or “the statements do not comply with the required framework or standards.“
Key Takeaways
- A review is an assessment of a company’s financial statements and operations.
- It is less extensive than an audit and is performed by the company’s internal audit team or an external consultant.
- The review provides limited assurance on the financial statements and identifies any significant errors or omissions.
How is a review conducted?
Generally, a review engagement is conducted after an organisation’s financial statements have already been prepared and verified to be error-free. The concerned organisation then employs an external auditor or accountant to review the financial reports.
A review engagement entails the following steps:
- Making inquiries and examining financial reports.
- Inspecting the accounting principles and practices of the concerned organisation.
- Applying analytical procedures to compare current year balances with the previous year or the current year balances with the auditor’s expectations.
If the auditor or the accountant encounters unexpected results, inquiries regarding the management or staff may be made.
If no satisfactory explanation is rendered, the auditor or accountant may ask for supplementary documents for evidence of the deviation.
Such supplementary documents may include ageing schedules, detail schedules and bank statements. Besides that, the auditor may also ask for the legal documents used to draft the financial statements.
As the procedures involved in a review engagement are not intensive, the auditor cannot give a definite opinion regarding the integrity of the financial statements.
Nevertheless, the results of a review engagement do have the potential to provide an organisation with the much-needed respite using statements like- “based on the reviews conducted by us, no section of your financial statement came to our attention that should be changed or modified to comply with the reporting standards or framework.“
Advantages of Review
Despite being a lesser audit version, review engagement has some remarkable benefits.
- Relatively cheaper: Review engagements tend to be comparatively inexpensive than audits. Consequently, even smaller organisations can undergo reviews and get their financial statements verified.
- Registered company auditors are not mandatory: Unlike audits, reviews do not necessarily require a certified company auditor.
- Retains the confidence of stakeholders: With periodical reviews, organisations can successfully maintain the trust of their stakeholders like investors, buyers and prospective lenders.
- Helps in getting small credits or loans: Reviewed financial statements enable organisations to seek small loans and credits.
Disadvantages of Review
Even though reviews are less expensive than audits, their limitations make them less productive in verifying an organisation’s financial records. The following are some significant disadvantages of review engagements.
- Limited assurance: The level of assurance provided by reviews is lower than that of audits.
- Limited examination: The procedures involved in review engagements are far less intensive than audits.
- Lower fault detection rate: As the procedures involved in reviews are not so thorough, the probability of detecting faults in financial reporting is relatively low.
- https://www.emerald.com/insight/content/doi/10.1108/09513579810231493/full/html
- https://journals.sagepub.com/doi/abs/10.1177/0148558X9801300203
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