A review of financial statements gives limited assurance. The accountant performs mainly inquiry and analytical procedures and concludes whether anything came to their attention indicating that the statements need material modification to conform with the applicable framework. The requirements sit in AR-C section 90, Review of Financial Statements, read together with AR-C section 60, General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services.
This guide walks through a review in the order most firms perform it. For how a review compares with a compilation and an audit, see SSARS explained: compilation vs review vs audit.
What a review is, and what it is not
A review is a service with less assurance than an audit and more than a compilation. The accountant does not test accounting records, confirm balances, observe inventory or obtain evidence about internal control in the way an audit does. The conclusion is expressed in negative form: the accountant is not aware of any material modifications that should be made.
Because the assurance is limited, the quality of the inquiry and analytics matters. A review file made up of a trial balance and a template report does not show that the accountant understood the entity or followed up on unusual items.
Step 1: Accept the engagement
Check independence
A review is an attest engagement, so the accountant and the firm must be independent of the entity under the AICPA Code of Professional Conduct. If you also keep the books or prepare the financial statements, those are nonattest services that need the safeguards in the Code's nonattest services interpretation before you can accept the review. Settle this before the engagement letter goes out.
Check the preconditions
AR-C 60 and AR-C 90 expect the accountant to establish that the preconditions are present. In practice, confirm that:
- the financial reporting framework is acceptable, for example US GAAP, or an acceptable special purpose framework such as the tax basis
- management accepts responsibility for the financial statements, for the information given to the accountant and for internal control relevant to the preparation of the statements
- management will give the accountant access to the information, people and written representations the review needs
Sign the engagement letter
The understanding with the client must be documented in a written engagement letter. Most firms have the accountant and management both sign. The letter should cover the objective and scope of the review, the accountant's responsibilities, management's responsibilities, the fact that a review is not an audit and will not necessarily disclose fraud or illegal acts, and the form of the report. See the review engagement letter template.
Step 2: Understand the entity and the framework
AR-C 90 requires the accountant to have an understanding of the industry in which the entity operates, including its accounting principles and practices, and of the entity itself, including its business, its accounting records and its accounting personnel. The depth is lower than the risk assessment in an audit, but it must be enough to tell what a reasonable number looks like.
For a repeat client, update the prior-year understanding rather than start over. For a new client, include a read of the prior-period financial statements, the prior accountant's report if any, and the current year's draft trial balance.
Step 3: Analytical procedures
AR-C 90 requires analytical procedures applied to the financial data to identify unusual relationships and items that appear unusual, so the accountant can focus the inquiries. The standard describes comparing current statements with prior periods, comparing them with anticipated results such as budgets or forecasts where available, and studying relationships among elements that are expected to follow a predictable pattern.
AR-C 90 also has the accountant determine materiality for the financial statements as a whole and use it in designing procedures and evaluating results; the materiality calculator can help with the arithmetic. A usable analytics workpaper (see the review engagement analytical procedures workpaper) has these features:
- Current-year and prior-year balances side by side, with the dollar and percentage change.
- An expectation for the larger or less predictable movements, for example revenue against units and price, or interest expense against average debt and rate.
- A threshold for what needs an explanation, set with reference to the client's size and the level the accountant considers material.
- The explanation obtained, who gave it, and whether it is consistent with what else the accountant knows. An answer of "business was up" is not an explanation.
For the audit-side version of the same technique, see analytical procedures under AU-C 520. Ratios can help. The financial ratio calculator and the current ratio calculator give a quick comparison of liquidity and leverage measures across periods.
Step 4: Inquiries
Analytics tell you where to ask. AR-C 90 also lists matters the accountant should inquire about regardless of the analytics. The list includes the following areas:
- accounting principles and practices and the methods of applying them, including whether they are consistent with prior periods and the industry
- procedures for recording, classifying and summarizing transactions and disclosing information in the statements
- actions taken at meetings of owners, the board and committees that may affect the statements
- subsequent events and whether any have a material effect on the statements
- the existence of related parties and transactions with them
- management's knowledge of fraud or suspected fraud affecting the entity
- legal and regulatory matters, commitments and contingencies
- management's plans for the entity to continue as a going concern, when conditions suggest doubt
Direct inquiries to people who would know. The owner, the controller or bookkeeper, and for larger entities, the people responsible for operations, are different sources. Document the person, the date and the answer, not a generic "inquired of management."
When answers do not make sense
If inquiries or analytics lead the accountant to believe the financial statements may be materially misstated, AR-C 90 requires additional procedures to obtain limited assurance. That can include inspecting a contract, obtaining a bank statement, or performing a limited test of an item. These extra procedures are the review equivalent of following the evidence: they are scaled to the doubt, not a conversion into an audit.
Step 5: Read the statements and obtain representations
The accountant reads the financial statements to consider whether they appear to conform with the applicable framework, including whether the disclosures are adequate in light of the framework. A disclosure checklist keeps this consistent; the GAAP disclosure checklist is one starting point.
AR-C 90 also requires written representations from management, covering responsibility for the statements, completeness of information provided and the other matters the standard lists. The representation letter should not be dated after the report date, and it should cover the matters relevant to the engagement. See the management representation letter template for a structure to adapt, and the review representation letter for the review version, and remember that a review letter is not the same as an audit letter.
If management refuses to provide the required representations, the accountant generally cannot complete the review and considers withdrawal.
Step 6: Documentation
AR-C 90 requires documentation sufficient for an experienced accountant with no previous connection to the engagement to understand the nature, timing and extent of procedures and the results. Plan on the following in the file:
- the signed engagement letter and the independence evaluation
- the understanding of the entity and the framework
- the analytical procedures performed, the expectations and the results
- the inquiries made, of whom and with what answers, and how inconsistencies were resolved
- additional procedures performed and their results
- the representation letter
- significant matters, discrepancies and how they were resolved
- evidence of review by the engagement partner or reviewer under the firm's quality management policies
The firm's quality management system under SQMS No. 1 applies to reviews as well as audits. See the SQMS 1 guide.
Step 7: The review report
The report is where the limited assurance is stated; see the review report template. AR-C 90 prescribes its form: a title that indicates it is an independent accountant's review report, an addressee, a paragraph identifying the statements reviewed and management's responsibility, a section on the accountant's responsibility explaining the review was performed under SSARS and is substantially less in scope than an audit, the conclusion, the signature of the firm, the city and state, and the date.
The conclusion states that the accountant is not aware of any material modifications that should be made for the statements to be in accordance with the framework. When a departure from the framework is identified and not corrected, the report carries a modified conclusion, qualified or adverse, with a paragraph describing the departure. Unlike a compilation, a review does not allow management to omit substantially all disclosures.
Report date
The report is dated no earlier than the date the accountant has obtained sufficient appropriate evidence to support the conclusion, including that management has approved the statements and taken responsibility for them. Avoid dating the report on the signing day of the engagement letter or on the day the draft first goes out.
Common file problems
- No documented independence evaluation, especially where the firm also prepares the statements.
- Analytical procedures that compare balances but never document expectations or explanations.
- Inquiry documentation that says only "inquired of management."
- Representation letters missing, undated or dated after the report.
- Disclosure checklists not completed, or completed with every item "yes."
- Report wording copied from an old template and no longer matching the current standard or the framework used.
Frequently asked questions
Does a review require independence?
Yes. A review is an attest engagement, so the accountant must be independent under the AICPA Code of Professional Conduct. If the accountant is not independent, a compilation under AR-C 80 with the required statement about lack of independence is the usual option.
How much testing does a review include?
None in the audit sense. A review relies on analytical procedures, inquiry and additional procedures where something appears misstated. It does not include confirmation, inspection of records or testing of internal control as a routine matter.
Can the firm prepare the financial statements and also review them?
It can, if the nonattest service safeguards in the AICPA Code are met and independence is not impaired. Management must take responsibility for the statements and have the skills, knowledge and experience to oversee the service.
Do reviewed statements need full disclosures?
Yes. Reviewed statements must include the disclosures the applicable framework requires. Omitting substantially all disclosures is allowed in a compilation or preparation engagement but not in a review, so a client that wants to leave them out needs a different level of service.
Which engagement letter should I use for a review?
Use a letter written for a review, not a compilation or audit letter, and cover the scope, responsibilities, the limited assurance and the form of report. A template is available on the review engagement letter page.
Sources
- AICPA, AR-C Section 90, Review of Financial Statements
- AICPA, AR-C Section 60, General Principles for Engagements Performed in Accordance With SSARS
- AICPA, AR-C Section 80, Compilation Engagements
- AICPA Code of Professional Conduct, ET 1.200 (Independence) and ET 1.295 (Nonattest Services)
- AICPA, SQMS No. 1, A Firm's System of Quality Management; SSARS No. 26, Quality Management
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Part of CORAA University · Engagement and acceptance: 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