Every quarter, an SEC registrant files unaudited condensed financial statements on Form 10-Q. The statements are not audited, but they are not left unexamined either. Regulation S-X Rule 10-01 requires an independent accountant to review them before filing. This guide covers what the rule says, how the review report comes into play, what the condensed statements must contain and how to organize the quarterly review file.
The rule: review before filing
Rule 10-01(d) of Regulation S-X provides that interim financial statements included in quarterly reports on Form 10-Q must be reviewed by an independent public accountant using applicable professional standards before the registrant files. The rule names no standard. It points to the applicable professional standards and procedures, as the Commission may modify or supplement them, so a firm cannot treat the review as optional because the statements are unaudited.
The review report has a conditional role. If the registrant states in any filing that the interim statements were reviewed by an independent public accountant, the accountant's report on the review must be filed with the interim statements. A registrant that says nothing about the review in the filing is not required to file the report, but the review itself has still been required. A registrant that states it in any filing triggers the filing of the report.
For a firm, the consequence is plain. The review is part of the quarterly close for the issuer, the review documentation is part of the firm's file, and a sentence in a filing about the review changes what becomes public.
Which standard applies
Rule 10-01(d) refers to applicable professional standards, so the standard depends on the client. For an issuer, the PCAOB's interim review standard governs the firm's work, and it sits alongside the audit standards the firm already follows for that registrant. This guide covers the SEC rule and does not paraphrase the PCAOB standard's paragraphs. The review program that the firm builds from that standard belongs in the file.
What the condensed statements contain
Rule 10-01(a) sets the form of the statements the accountant reviews. The statements follow the general form and content of presentation used in the rest of Regulation S-X, with these relaxations:
- They cover the registrant, its consolidated subsidiaries and its predecessors, and they may be unaudited.
- Balance sheets show major captions only, except for inventories. A caption under 10 percent of total assets may be combined with another if it has not changed by more than 25 percent since the fiscal year-end.
- Income statement captions under 15 percent of average net income for the three most recent fiscal years may be combined, if they have not changed by more than 20 percent from the corresponding interim period of the prior year.
- The cash flow statement may be abbreviated, starting with a single figure for net cash flows from operating activities. Investing and financing changes are shown individually only when they exceed 10 percent of the average of net operating cash flows for the most recent three years.
- Footnotes may omit duplicated disclosure that the prior annual report already supports, such as accounting policies and details of unchanged accounts, but disclosure must be adequate to make the interim information not misleading.
Rule 10-01(c) sets the periods for a Form 10-Q: a balance sheet at the end of the most recent fiscal quarter and one at the end of the preceding fiscal year, income statements for the most recent quarter, the year-to-date period and the corresponding prior-year periods, and cash flows for the year-to-date and prior-year comparative period.
Rule 10-01(b) adds content that the reviewer should confirm is present. Unaudited statements must reflect all adjustments that management considers necessary for a fair presentation, with a statement saying so. Nonrecurring adjustments are described. Material retroactive prior-period adjustments are disclosed with their effects. After an accounting change, a letter from the registrant's independent accountant stating whether the change is preferable is filed as an exhibit to the first Form 10-Q after the date of the change, unless the change was required by a FASB standard.
Worked example: a 10 percent and 25 percent caption test
Granite Ridge Industries, a calendar-year issuer, has total assets of $180 million at September 30. Its prepaid expenses and other current assets caption is $14.4 million, up from $10.9 million at December 31.
The caption is 8 percent of total assets, which is under the 10 percent threshold. Whether it can be combined with another line depends on the second test: it moved from $10.9 million to $14.4 million, an increase of 32 percent. That exceeds 25 percent, so the registrant cannot fold the caption into another and must show it separately.
The reviewer's file records both calculations, the conclusion and the disclosure outcome. A review file that merely says the balance sheet captions were reviewed gives a later reader nothing to test.
Organizing the quarterly review file
A quarterly review file should show the following.
- Engagement terms for the review. The engagement letter covers the quarterly review and says whether the review report will be requested for filing.
- Understanding of changes since year-end. New contracts, debt amendments, restructurings, acquisitions and control changes since the last audit, drawn from the minutes and from inquiry.
- Analytical procedures. Quarter-over-quarter and year-over-year comparisons on the statements, with expectations built before the numbers are read and explanations for variances. See analytical procedures under AU-C 520.
- Inquiries and representations. Inquiries of management on subsequent events, litigation and unusual entries, with a written representation letter.
- Disclosure checklist. A tie-out to Rule 10-01(a) through (c) for presentation, periods and omissions.
- Conclusion and communication. Matters to report to the audit committee, and any item that affects the interim statements' conformity with GAAP.
Where the quarter surfaces an error in a previously issued period, a separate chain starts. The issuer may owe a filing under Form 8-K Item 4.02. See Form 8-K Items 4.01 and 4.02.
Common failures
- Treating the review as a lighter audit. The review rests on inquiry and analytical procedures. A file that shows only tick marks on a trial balance gives a later reader nothing to test.
- Missing the tie-out to the prior year-end balance sheet. The 10-Q presents the year-end balance sheet, which should agree to the audited statements.
- Silence on the review report trigger. If a registration statement says the interim statements were reviewed, the review report has to accompany them. Check the issuer's drafting before the filing goes out.
- Skipping the preferability letter. A voluntary change in principle requires the accountant's preferability letter as an exhibit.
Related reading
The SEC forms audit touchpoints page shows where the review sits relative to the annual audit and Form 8-K. For staleness of financial statements in registration statements, see age of financial statements under Regulation S-X.
Where CORAA fits
CORAA prepares ready-to-review audit files for US CPA firms, including the comparative schedules, variance workpapers and tie-outs a quarterly review file needs. The firm keeps the client, the review and the signature. See /us.
Sources
- Legal Information Institute, 17 CFR 210.10-01, Interim financial statements: https://www.law.cornell.edu/cfr/text/17/210.10-01
Part of CORAA University · SEC reporting and PCAOB audits: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error