Review Engagement
A professional examines a company's financial statements to identify any significant errors or inaccuracies
What is Review Engagement?
In a review engagement, a professional examines a company's financial statements to identify any significant errors or inaccuracies. It is commonly referred to as a limited assurance or negative engagement.
These engagements are conducted by qualified professionals, often Certified Public Accountants (CPAs), who assess financial information to provide a limited form of assurance. However, it's important to note that this assurance is limited and doesn't provide a guarantee.
An accountant may conduct a review engagement independently or after completing an audit of a company's financial statements.
Throughout the process, the auditor conducts interviews and analytical assessments to offer a reasonable level of confidence necessary for generating a report with a negative assurance.
In a negative assurance report, the auditor specifies if they came across any information that would lead to material modifications in the financial statements.
A review engagement differs from an audit because it offers less certainty to the intended user.
Key Takeaways
- A review engagement offers a moderate level of assurance regarding a company's adherence to the relevant financial reporting standards in its financial statements.
- Often conducted by certified public accountants (CPAs), it provides limited assurance, commonly known as negative assurance.
- It requires less time than an audit engagement due to reduced effort.
- The objective of this procedure is to discover any inaccuracies in a company's financial records and communicate them in a negative assurance report.
- Auditors must adhere to the Code of Ethics for Professional Accountants, including principles like independence, integrity, and professional competence.
Understanding Review Engagement
A review engagement involves an auditor examining a company's financial statements to identify any significant errors or misstatements.
These procedures occur once the company has finalized its financial statements and ensured their accuracy. The company hires an external accountant to examine and assess the financial information.
As the financial statements have already been certified as accurate, the external accountant is tasked with providing negative assurance, confirming that the financial statements are devoid of substantial misstatements.
Accountants use analytical procedures to enhance their comprehension of the financial figures in the review process.
Unlike an audit, a review engagement involves less extensive procedures, leading to the accountant being unable to offer an opinion on the fairness of the financial statements.
General Principles of a Review Engagement
The following are the general principles of a review engagement:
- The auditor must follow the Code of Ethics for Professional Accountants set forth by the International Federation of Accountants.
- The ethical principles that govern the auditor's professional responsibilities include:
- Independence
- Integrity
- Objectivity
- Professional competence
- Confidentiality
- Professional behavior
- Adherence to technical standards
- The auditor must review as per the guidelines outlined in this ISRE.
- The auditor must approach the review with professional skepticism, acknowledging that situations could lead to significant inaccuracies in the financial statements.
- To convey negative assurance in the review report, the auditor must gather enough relevant evidence, primarily through questioning and analytical methods, to draw informed conclusions.
Parties Involved in a Review Engagement
The review engagement comprises various parties, each with designated roles.
1. Management Team
The management is tasked with creating the primary financial documents—the balance sheet, income statement, and cash flow statement—following the guidelines set by the financial reporting framework.
The management must establish internal control systems to ensure the accurate preparation of financial statements without significant errors. They need to offer the accountant the relevant financial data to facilitate the timely preparation of financial statements.
2. Practitioner
The person conducting a review engagement must be licensed. This professional is obligated to gather evidence firsthand instead of depending on information supplied by external sources.
They need to undertake processes to assess whether any findings lead them to suspect the financial statements may not comply with the applicable financial reporting framework.
The steps that the professional must take include:
- Examination of the company's accounting methods
- Statements from management regarding the precision of financial statements
- Oversight by management regarding internal control systems
- Management's obligation to identify and prevent fraud
- Details about events occurring after the reporting period
- Understanding of fraudulent activities
- Ratios and associations among documented figures
- Analytical processes for making comparisons
- Reception of pertinent financial data
- Protocols for the recording of financial information
3. Financial Statement Users
These individuals focus on the company's financial statements, using them as a basis for their decision-making. Any inaccuracies in the financial statements will have consequences for them.
Preparing financial statements for a review engagement aims to enhance confidence in the accuracy of the company's financial records. These users can be shareholders, investors, creditors, etc.
Financial statements are regarded as materially misstated if they include mistakes, fraudulent activities, or omissions capable of impacting the economic choices of the user.
Review Engagement vs. Audit Engagement
Let's understand the differences between Review Engagement and Audit Engagement.
| Aspect | Review Engagement | Audit Engagement |
|---|---|---|
| Purpose | Limited assurance on financial statements. | Comprehensive assurance on financial statements. |
| Objective | Determine if any material modifications need to be made to the financial statements. | Express an opinion on whether the financial statements are prepared as per the applicable financial reporting framework and present a true and fair view. |
| Procedures | Inquiries and analytical procedures. Limited verification and substantiation. | Rigorous procedures, including understanding internal control systems, verification, substantiation, inquiries, and analytical procedures. |
| Assurance Level | Moderate assurance. | High assurance. |
| Opinion Options | No opinion is issued. | Unqualified, Qualified, or Adverse opinion based on findings. |
| Reporting Responsibility | A report is issued stating that the reviewer is not aware of any material modifications. | A detailed report expressing the auditor's opinion along with explanations for any qualifications or issues found. |
| Scope of Work | Limited scope; focuses on key areas of financial statements. | Comprehensive scope; covers all relevant aspects of financial statements and internal controls. |
| Independence Requirements | Less stringent compared to audits. | Strict independence requirements for auditors. |
| Detection of Fraud | Limited emphasis on fraud detection. | Emphasis on detecting material misstatements, including fraud. |
Types of Review Engagement
The following are some of the types of review engagement:
1. Attestation Engagement
In an attestation engagement, the professional must examine the documentation the company's management has prepared. The practitioner may need to examine the control systems implemented by the management team. This type of engagement involves reviewing the client's information and providing an opinion based on the assessment. The auditors must assess the information given to them through inquiries and analytical procedures. These assignments provide a moderate level of confidence.
2. Direct Engagement
In direct engagement, practitioners must examine and assess the client's information. The practitioner must convey their findings and conclusions in the negative assurance report. This engagement involves the practitioner communicating directly with the intended users of the financial statements. Users count on these direct reports to guide their economic choices, and these reports also furnish a moderate level of confidence to individuals relying on financial statements.
3. Compilation Engagement
The accountant compiles financial information provided by the client into financial statements without providing any assurance of their accuracy or completeness.
4. Review of Financial Statements
The accountant performs analytical procedures and inquiries to obtain limited assurance regarding the absence of material misstatements in the financial statements under the applicable financial reporting framework.
5. Agreed-Upon Procedures (AUP) Engagement
The accountant performs procedures agreed upon by the parties involved (client and accountant) and reports findings based on those procedures.
6. Internal Control Review
The accountant assesses and reports on the effectiveness of internal controls related to financial reporting.
7. Prospective Financial Information (PFI) Review
The accountant reviews prospective financial information to express moderate assurance on whether the information is presented in accordance with specified criteria.
8. Review of Interim Financial Information
The accountant reviews the financial information of an entity for a period shorter than a full fiscal year, providing limited assurance.
Conclusions and Reporting
The review report is a critical component, providing a clear assurance based on the examination findings.
The auditor is required to thoroughly examine and evaluate the conclusions derived from the evidence gathered, forming the basis for the negative assurance statement.
The auditor must evaluate whether the information gathered during the examination suggests that the financial statements do not accurately represent a true and fair view (or are not presented fairly in all material aspects) following the specified financial reporting framework.
The report on a review of financial statements typically includes the following essential components, usually organized in the following structure:
- Title
- Addressee
- Opening or introductory paragraph which covers
- Identification of the financial statements subject to review
- A declaration outlining the responsibilities of both the entity's management and the auditor
- Scope paragraph detailing the review's nature, including
- A mention of the applicable ISRE for review engagements or relevant national standards
- A statement that the review involves inquiries and analytical procedures
- A clarification that the procedures conducted offer less assurance than an audit and no audit opinion is provided
- Statement of negative assurance
- Date of the report
- Auditor's address
- Auditor's signature
Review Engagement Examples
The following are some examples of review engagements:
Example 1
XYZ Consulting Services is a small consulting firm that provides advisory services to various clients.
At the end of the fiscal year 2022, the management of XYZ Consulting Services engaged an independent accountant to review their financial statements.
The practitioner created a negative assurance that highlighted problems and issues by examining and analyzing the situation:
"After conducting our thorough review, which involved discussions with management and the application of analytical procedures to financial data, we have provided a limited level of assurance regarding the absence of significant adjustments needed for the financial statements of XYZ Consulting Services for the year ending December 31, 2022.
We observed that the company implemented a new revenue recognition policy during the year, and aside from the effects of this modification, we have not identified any issues that would lead us to doubt the fair presentation of the financial statements under the relevant financial reporting standards."
Example 2
In May 2010, the American Institute of Certified Public Accountants (AICPA), through its Accounting and Review Services Committee (ARSC), declared modifications to the standard procedures for review engagements.
The updates involve:
- Explaining why independence may be lacking
- Identifying the relevant financial reporting rules
- Distinguishing between instructions for compilation and review
- Clarifying the steps for conducting a review
Advantages and Disadvantages of Review Engagements
The following are some of the advantages and disadvantages of review engagements:
Advantages are:
- Cost-Effective: This procedure is generally less expensive than audits. This makes them a more affordable option for businesses that do not require the highest level of assurance.
- Timeliness: Reviews can often be completed more quickly than audits, providing timely financial information to management, stakeholders, and external parties.
- Limited Assurance: While not as comprehensive as an audit, a review provides moderate assurance. This may meet the needs of stakeholders seeking reassurance regarding the reliability of financial statements without necessitating the comprehensive scrutiny involved in an audit.
- Flexibility: These services can be customized to meet the client's specific requirements. This adaptability enables a more personalized approach, concentrating on specific areas of interest or priority.
- Less Disruption: Reviews are generally less disruptive to the business's daily operations than audits.
Disadvantages include:
- Limited Assurance: While a review offers some level of assurance, it is not as comprehensive as an audit. Users of the financial statements must understand the limitations of the procedures performed.
- Risk of Misstatement: There is a higher risk of material misstatements not being detected in a review compared to an audit. This is because the procedures in a review are limited in scope.
- Not Appropriate for All Situations: Some stakeholders, such as creditors or regulatory bodies, may require a higher level of assurance provided by an audit. In such cases, a review engagement may not meet the requirements.
- Less Independence: The accountant or auditor's independence level in a review engagement is lower than in an audit. This may impact the perceived objectivity and reliability of the review process.
- Limited Detection of Fraud: These engagements are not designed to detect fraud to the same extent as audits. If fraud is a significant concern, an audit may be more appropriate.
Review Engagement vs. Compilation Engagement vs. Notice To Reader
Let’s understand the differences between Review Engagement, Compilation Engagement, and Notice To Reader:
| Aspect | Review Engagement | Compilation Engagement | Notice To Reader |
|---|---|---|---|
| Purpose | Limited examination for significant misstatements | Basic summary without examination or assurance | Compilation of information with a notice |
| Assurance Level | Moderate or limited assurance | No assurance provided | No assurance provide |
| Examination of Records | Limited examination of financial records | No examination of financial records | No examination of financial records |
| Internal Control System | Consideration of internal control system | No consideration of the internal control system | No consideration of the internal control system |
| Financial Statement Users | Provides assurance to financial statement users | Does not assure financial statement users | Does not assure financial statement users |
| Cost Efficiency | More expensive due to detailed examination | Less expensive as procedures are less time-consuming | Cost-effective as it does not involve detailed examination |
| Level of Detail | Involves a moderate or limited level of detail | Basic summary with less detail | Compilation without detailed examination |
| Opinion or Assurance | Provides a moderate or limited level of assurance | No assurance provided | No assurance provided |
| Communication to Users | Conveys limited assurance about financial statements | Conveys no assurance, provides basic information | Provides information with a notice, no assurance |
| Usefulness for Users | Useful for users seeking some level of assurance | Basic information; is less useful for users seeking assurance | Basic information with a notice, not for assurance |
| Procedures Involved | Involves procedures to detect significant misstatements | Limited procedures, no detailed examination | Compilation procedures without detailed examination |
Review Engagement FAQs
The primary objective is to assess whether the financial statements are plausible and free from material misstatement. The accountant performs analytical procedures and inquiries to identify any significant errors or inaccuracies
A Certified Public Accountant (CPA) engages in the process of providing assurance, which may be either positive or negative based on the findings. Initially, the company's accountants create and validate the accuracy of the financial statements.
Reviews are typically less extensive than audits, focusing on inquiry and analytical procedures rather than the comprehensive testing conducted in audits.
In a review, the accountant does not provide the high level of assurance that an audit does. Reviews focus on inquiry and analytical procedures rather than extensive testing of transactions and controls.
Creditors, investors, regulatory bodies, or other external parties may request or accept this procedure.
A review cannot guarantee complete assurance and may not uncover all material misstatements. It also doesn't include an assessment of internal controls or the thorough testing conducted in an audit
Independence is not a compulsory requirement for a negative assurance report. While negative assurance offers only limited assurance, there is no mandate for the auditor to uphold independence. The auditor needs to hold a valid practitioner's license
or Want to Sign up with your social account?