“So, what are you actually doing with my financial statements?”
That’s a question I’ve had from more than one business owner, and it’s a good one. If you’ve never been through a review engagement before, it can be difficult to understand what you’re actually paying for. Are we checking every transaction? Are we testing everything? Or are we just looking at the numbers and calling it a day?
The answer is somewhere in between.
Most business owners have heard the terms compilation, review, and audit, but the differences aren’t always clear. Each one involves a different level of work and assurance. For many owner-managed businesses, a review ends up being the middle ground: more assurance than a compilation, but less extensive testing than an audit.
The Short Version
A review engagement provides limited assurance that the financial statements are free from material misstatement.
We’re not going through every transaction and independently verifying every number. Instead, we use analytical procedures, inquiry, and professional judgment to determine whether the financial statements make sense and whether anything stands out that needs further investigation.
Think of it like taking your car to a mechanic. An audit would be more like putting the car up on the hoist and conducting a detailed inspection. A review is more like taking it for a drive, checking the fluids, listening for anything unusual, and investigating anything that doesn’t seem right.
What We’re Actually Doing
Analytical Procedures
A significant part of a review involves looking at your numbers and asking whether they make sense.
We compare the current year to prior years and look at trends and relationships between accounts. We might look at gross margins, accounts receivable days, expenses as a percentage of revenue, or changes in debt.
For example, if revenue increased by 20% but your cost of goods sold barely changed, that’s something we’ll want to understand. Maybe you increased your prices or changed your product mix. Or maybe something was recorded incorrectly.
The point isn’t that every unusual change means there’s an error. It’s that unusual changes give us something to investigate.
Inquiry
We also ask questions.
We’ll talk to you, your bookkeeper, or your controller about significant or unusual transactions and changes in the business. That could include things like new financing, lawsuits, major contracts, related-party transactions, or anything else that could affect the financial statements.
A lot of the value in a review comes from these conversations. You know your business; we know financial reporting. Putting the two together helps us understand whether the numbers tell the right story.
Reconciliations and Supporting Schedules
We look at key balance sheet accounts and the supporting schedules behind them. This can include bank accounts, loans, capital assets, accounts receivable, and accounts payable.
If the financial statements show a $500,000 loan, for example, we want to understand how that balance ties into the underlying records.
This is also why having reconciled accounts and organized supporting schedules can make a review much more efficient.
Following Up
If something doesn’t make sense during our work, we don’t just ignore it.
We may ask additional questions, request supporting documentation, or perform additional procedures on that specific item.
The important distinction is that this work is targeted, rather than comprehensive. We’re investigating areas where our procedures indicate that something may need a closer look.
What We’re Not Doing
This is one of the biggest differences between a review and an audit.
We’re not going through every transaction and matching it back to an invoice or receipt. We’re not performing a full test of internal controls, physically confirming inventory, or sending confirmation letters to every customer and vendor.
That type of extensive testing is part of an audit and is a major reason why an audit requires significantly more time and resources.
A review also isn’t a guarantee that there are no errors or fraud in the financial statements. There may be transactions or balances that we don’t independently verify. A review provides limited assurance based on the procedures performed; it isn’t designed to provide the same level of assurance as an audit.
Why Do Businesses Get a Review?
There are a few common reasons.
A lender may require reviewed financial statements as part of a financing agreement. Minority shareholders may want more assurance over the company’s financial results. Or the business may simply have reached a point where a compilation no longer provides enough comfort for the owners or other stakeholders.
It’s also worth noting that a review isn’t automatically required by law for most private companies. Depending on the circumstances, shareholders may be able to waive the requirement.
That means it’s worth periodically asking whether the level of assurance you’re paying for still makes sense for your business.
How Can You Make a Review Go Smoothly?
The biggest factor isn’t necessarily how complicated your business is. It’s how organized the books are when we start.
Reconciled accounts, up-to-date supporting schedules, documentation for unusual transactions, and a bookkeeper or controller who can answer questions promptly can make a huge difference. It reduces the back-and-forth, helps us complete the engagement more efficiently, and can ultimately reduce the cost.
If you’re not sure whether your business needs a compilation, review, or audit, it’s worth having that conversation before year-end.
The goal isn’t to choose the most expensive option. It’s to choose the level of assurance that makes sense for your business, your stakeholders, and what you actually need from your financial statements.
