What Is a Review Engagement?
A review engagement is a type of assurance service provided by an accountant that offers limited assurance on financial statements. Falling under the broader category of financial reporting and assurance, a review engagement provides a level of comfort lower than an audit but higher than a compilation or preparation engagement. The objective is for the accountant to state whether, based on inquiry and analytical procedures, anything has come to their attention that causes them to believe the financial statements are not presented in accordance with the applicable financial reporting framework, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). This type of service is particularly useful for private entities or those seeking moderate assurance for stakeholders without the expense and extensive scope of a full audit.
History and Origin
The framework for review engagements primarily evolved through the standards set by professional accounting bodies. In the United States, the American Institute of Certified Public Accountants (AICPA) plays a pivotal role in establishing these guidelines through its Statements on Standards for Accounting and Review Services (SSARS). The AICPA's Accounting and Review Services Committee (ARSC) is responsible for developing and updating these standards, ensuring they remain relevant to the evolving landscape of public accounting and client needs.6 A significant update occurred with the issuance of SSARS No. 21 in October 2014, which clarified and recodified the standards for reviews, compilations, and engagements to prepare financial statements. This revision aimed to provide clearer distinctions between these services and streamline the requirements for practitioners.5 The continuous development of these standards reflects the ongoing effort to define the appropriate level of assurance services for various users of financial information.
Key Takeaways
- A review engagement provides limited assurance on financial statements, less than an audit but more than a compilation.
- The primary procedures involve inquiries of management and analytical procedures.
- Accountants express "negative assurance," indicating nothing came to their attention suggesting material modifications are needed.
- Review engagements are typically less costly and time-consuming than full audits.
- They are common for private companies seeking external assurance without requiring a statutory audit.
Interpreting the Review Engagement
The report resulting from a review engagement conveys a specific form of assurance known as "negative assurance." This means the accountant states that, based on their limited procedures, they are "not aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework."4 This contrasts with the "positive assurance" given in an audit, where the auditor expresses an opinion that the financial statements are presented fairly in all material respects. Users of a review report should understand that the procedures performed do not include detailed testing of transactions, assessment of internal controls, or corroboration of information obtained, which are hallmarks of an audit. Therefore, while a review provides a degree of credibility to the financial reporting, it does not offer the same comprehensive verification or opinion as an audit.
Hypothetical Example
Consider "GreenGrowth Organics," a growing private company seeking a bank loan for expansion. The bank requires some level of assurance on GreenGrowth's financial performance but determines that a full audit is not necessary given the loan amount and the company's established credit history. GreenGrowth engages a certified public accountant for a review engagement.
The accountant's process would involve:
- Inquiries: Asking GreenGrowth's management about significant accounting policies, unusual transactions, and the consistency of financial practices. For instance, inquiring about any significant changes in revenue recognition methods or inventory valuation.
- Analytical Procedures: Examining trends and ratios in GreenGrowth's financial statements and comparing them to prior periods or industry benchmarks. For example, if cost of goods sold suddenly decreased significantly relative to revenue, the accountant would inquire about the reason for this anomaly.
- Limited Documentation Review: Reading the financial statements and accompanying notes to ensure they appear plausible and are free from obvious misstatements.
After performing these procedures, the accountant would issue a review report. If no issues came to their attention, the report would state, "Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with Generally Accepted Accounting Principles." This report provides the bank with sufficient confidence in GreenGrowth's financial data to proceed with the loan, while being less intrusive and costly for GreenGrowth than a full audit.
Practical Applications
Review engagements are widely used across various sectors for different purposes, offering a balance between cost and assurance. Many small to medium-sized businesses (SMEs) opt for a review engagement when external parties, such as lenders, creditors, or potential investors, require a degree of assurance on their financial statements, but an audit is either not legally mandated or deemed excessively costly. For instance, a company applying for a line of credit from a bank might find that a review engagement satisfies the bank's requirements for financial oversight, as opposed to a more extensive and expensive audit.
Additionally, regulatory bodies in some jurisdictions may perform their own types of review. For example, the Financial Reporting Council (FRC) in the UK conducts corporate reporting reviews of public and large private companies' financial statements to ensure compliance with the Companies Act and other reporting requirements.3 While this is a regulatory oversight function rather than a service provided by a CPA to a client, it highlights the broader concept of reviewing financial information for plausibility and compliance in the interest of market integrity. Review engagements can also be beneficial in situations like potential business sales or partnership agreements where preliminary due diligence is needed, but full audit-level verification is reserved for later stages.
Limitations and Criticisms
Despite their utility, review engagements have inherent limitations due to their restricted scope. The most significant criticism is that they provide only "limited assurance" or "negative assurance," meaning the accountant is not providing an opinion on the fairness of the financial statements as a whole. Unlike an audit, a review engagement does not involve obtaining an understanding of internal controls, assessing fraud risk, or performing extensive corroborative procedures such as third-party confirmations or physical inspections.2 This means that a review engagement may not detect all material misstatements, especially those due to fraud or sophisticated errors, which a more thorough audit might uncover.
Another limitation is that a review engagement is not typically sufficient for publicly traded companies, which are generally required to undergo full audits to satisfy regulatory requirements and investor demands for higher levels of assurance services. Furthermore, companies sometimes mistakenly view a review as a stepping stone to an audit, assuming it will seamlessly transition. However, moving from a review to an audit in a subsequent year often requires additional audit procedures on the prior year's balance sheet, increasing workload and costs, as the review procedures themselves are not designed to provide reasonable assurance.1
Review Engagement vs. Audit
The distinction between a review engagement and an audit lies primarily in the level of assurance provided, the scope of procedures performed, and the resulting report.
| Feature | Review Engagement | Audit |
|---|---|---|
| Level of Assurance | Limited assurance (negative assurance) | Reasonable assurance (positive assurance) |
| Primary Procedures | Inquiry and analytical procedures | Extensive testing, inquiry, observation, confirmation, assessment of internal controls |
| Report Conclusion | "We are not aware of any material modifications..." | Opinion on whether financial statements are presented fairly in all material respects |
| Cost & Time | Generally lower cost and less time-consuming | Generally higher cost and more time-consuming |
| Purpose | Provides moderate credibility, often for private companies, lenders, or small investors | Provides high credibility, often required for public companies, large loans, or sales |
| Independence | Required for the accountant | Required for the auditor |
While a review engagement focuses on plausibility and significant anomalies, an audit aims to confirm the absence of material misstatement through detailed evidence gathering and rigorous testing. The choice between the two depends on the needs of the stakeholders and the specific circumstances, including regulatory requirements and the desired level of confidence in the financial reporting.
FAQs
Q: What is the main purpose of a review engagement?
A: The main purpose of a review engagement is to provide limited assurance that an accountant is not aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework. It offers a level of comfort without the extensive scope of an audit.
Q: Does a review engagement provide the same level of assurance as an audit?
A: No, a review engagement provides limited assurance, while an audit provides reasonable assurance. An audit involves more extensive procedures, including testing of internal controls and detailed transaction verification, to express a positive opinion on the financial statements.
Q: Who typically requests a review engagement?
A: Private companies often seek review engagements when their lenders, creditors, or other external users of their financial statements require a level of assurance that is more than a compilation but less than a full audit. This can be more cost-effective while still providing credibility.
Q: What procedures are commonly performed in a review engagement?
A: The primary procedures in a review engagement involve inquiries of management and the application of analytical procedures to the financial data. The accountant will look for unusual trends, ratios, and relationships to identify areas where financial analysis might suggest material misstatements.
Q: Can an accountant prepare financial statements and then perform a review engagement on them?
A: Yes, generally an accountant can prepare the financial statements and then perform a review engagement on them, provided they maintain their independence and adhere to all relevant professional standards. The AICPA's SSARS provide guidance on this, separating the preparation (a non-attest service) from the review (an attest service requiring independence).