Definition
A review engagement is a type of financial statement assessment done by an auditor that is less intensive than a full audit, but more detailed than a compilation. It involves the auditor conducting analytical procedures and inquiries to provide limited assurance that there are no material modifications that should be made to the financial statements. It is typically used by smaller companies and organizations that don’t require a complete audit.
Key Takeaways
- A Review Engagement is a form of financial statement service performed by a certified public accountant (CPA) where they analyze financial statements to provide no assurance statements rather than full audit opinion. Financial information is reviewed to ensure its plausibility, but a review engagement is less rigorous than an audit.
- A main feature of a review engagement is that is offers limited assurance and less rigorous testing and corroboration than an audit. Thus, a review engagement is more cost effective and quicker than an audit, making it an attractive option for small to mid-sized entities.
- During a review engagement, the CPA performs inquiries, analytical procedures, and discusses matters of importance to ensure all material changes in the financial statement are disclosed in notes. They will issue a review report at the conclusion of the engagement which includes information about the scope of the review and any identified material modifications that should be made to the financial statements.
Importance
A Review Engagement is an important financial term as it refers to a type of examination conducted by an auditor into the financial statements of a company, providing a moderate level of assurance about their accuracy.
This is less rigorous than an audit but still essential to provide comfort to the stakeholders.
With a review engagement, the auditor mostly conducts inquiries and analytical procedures of the available financial data to express a conclusion whether any material modifications should be made.
This gives stakeholders, including investors, shareholders, financial institutions, and others, better insight into the company’s financial position and performance, enhancing their decision-making capabilities.
This process thus increases transparency, helps maintain regulatory compliance, and can boost the company’s credibility and reputation.
Explanation
A Review Engagement serves a specific purpose in the financial landscape, often providing a moderate level of assurance to third parties who rely on an organization’s financial statements. This assurance comes from a financial specialist, such as a CPA or accounting firm, conducting a thorough analysis of an organization’s financial statement without delving as deep as they would do during an audit.
These third parties that rely on the reviewed financial statements often include potential investors, financial institutions, and government bodies, among others. The principal use of a Review Engagement is to deliver credible financial insights while not undertaking a full-scale forensic study of every detailed transaction involved, which would be more time-consuming and cost-intensive.
Therefore, it serves as a cost-effective, time-efficient tool to obtain a reasonable level of assurance regarding the accuracy of an organization’s financial statements. Furthermore, these engagements can help organizations identify financial discrepancies, irregularities, or areas for improvement, bolstering financial management and potentially improving their financial standing.
Examples of Review Engagement
Small Business Audit: A small local business owner has trusted their accounting to a single accountant for several years. The owner wants to ensure that the finances are in order, but does not necessarily need a full audit carried out. The owner decides to have an external accounting firm come in and conduct a review engagement. The external auditors assess the company’s financial statements to provide limited assurance that the financial statements are free from material misstatement, without conducting an in-depth audit.
Non-profit Organization: A community-based non-profit organization had a successful fundraising year. The board of directors decided to invest some of the funds. To maintain transparency with their donors and community, and to ensure the funds were being handled properly, the non-profit organization hired an accounting firm to perform a review engagement. The accountants reviewed the financial statements and transactions related to the investments to provide a moderately detailed conclusion.
Mergers and Acquisitions: A large corporation is considering acquiring a smaller company. Before proceeding with transaction, the large corporation has their accounting team conduct a review engagement of the smaller company’s financial statements to provide limited assurance that there are no material misstatements or irregularities that could affect the perceived value or stability of the smaller company. This is critical information for negotiating the terms of the acquisition.
FAQ for Review Engagement
What is a Review Engagement?
A review engagement is a form of financial statement service performed by a qualified accountant. It involves reviewing financial information, applying analytical procedures, and generally providing assurance that the report is plausible and doesn’t contain material misstatements.
What are the primary goals of a Review Engagement?
The primary goals of a review engagement are to provide a moderate level of assurance to investors and potential investors that financial statements are free of material misstatements and to enable the accountant to identify any significant changes that may need attention or further investigation.
How does a Review Engagement differ from an Audit Engagement?
While both review and audit engagements share some similarities, they offer different levels of assurance. A review engagement provides a moderate level of assurance, while an audit provides high assurance through an in-depth examination and confirmation of account balances. An audit, therefore, is more comprehensive and rigorous than a review.
Who requests for Review Engagements?
Review engagements are often requested by third parties, such as banks, creditors, investors, and regulatory agencies who require less assurance than an audit but more than a compilation. It could also be requested by owner-managers or executives of a company who want to ensure the plausibility of the financial reports.
What is the process of a Review Engagement?
The process involves understanding the entity and its environment, inquiry and discussions related to the financial statements, and analytical procedures to assess the plausibility of information. Upon completion, a report is issued which includes a conclusion whether anything has come to the attention that suggests the financial information is not in accordance with the specified financial reporting framework.
Related Entrepreneurship Terms
- Financial Statements
- Audit Procedures
- Material Misstatement
- Assurance Engagement
- Independence Standards
Sources for More Information
- American Institute of CPAs: This organization provides information about various types of audit engagements, including review engagements.
- International Federation of Accountants: IFAC provides international standards on auditing, including standards for review engagements.
- Financial Accounting Standards Board: FASB provides U.S. generally accepted accounting principles (GAAP), which include standards for review engagements.
- IAS Plus by Deloitte: IAS Plus provides information about international financial reporting standards (IFRS), including guidance on review engagements.
