When it comes to financial reporting for privately held enterprises, there are various levels of assurance that Certified Public Accountants (CPAs) can provide. One such level, which offers more insight than a compiled financial statement, is a reviewed financial statement. In this blog, we’ll explore what reviewed financial statements entail, how they differ from compiled statements, and the key responsibilities involved in their preparation and review.

A reviewed financial statement is a step up from a compiled financial statement, requiring CPAs to perform more analytical procedures and make specific inquiries. While compilations are limited to organizing financial data without assurance, a review involves a more thorough understanding of the company's operations and accounting principles.

The CPA is tasked with examining whether the financial statements make sense on the surface by looking at the company's bookkeeping, accounting practices, and policies, as well as the actions of the board of directors and management. Essentially, a CPA must assess if the financial statements align with the company’s activities.

During a financial review, the CPA undertakes a series of analytical procedures and inquiries. The review begins with analyzing the balance sheet, income statement, and related financial statements such as statements of operations, retained earnings, and cash flows. These documents provide an essential snapshot of the company’s financial health for the relevant periods.

The key difference between a review and an audit lies in the depth of examination. While an audit involves expressing an opinion on the fairness of the financial statements, a review provides limited assurance. The CPA evaluates whether the figures on the financial statements seem reasonable without diving deep into every detail. For instance, the CPA may question the aging of accounts receivable or examine the depreciation schedule to ensure all assets are properly recorded. However, they won’t verify every individual transaction as they would in an audit.

A vital component of a review is the application of analytical procedures. CPAs analyze financial data, review trends, calculate ratios, and examine percentage variations. This analysis helps identify discrepancies or patterns that don’t seem to align with the business’s operations.

However, it's essential to understand that a review is not as in-depth as an audit. The procedures performed in a review are limited, meaning the CPA is not obligated to uncover every potential error or misstatement. Instead, the review provides limited assurance that no material modifications are required. In simpler terms, the CPA hasn’t found any major errors in the financial statements that would significantly impact the overall picture.

A critical distinction in reviewed financial statements is that management holds the responsibility for preparing and fairly presenting the financial statements. The CPA’s role is not to create the financial statements but to review them and ensure they make sense.

Management is also responsible for implementing and maintaining internal controls, which ensure the accuracy and integrity of the financial data. Internal controls consist of processes, checks, and balances that guarantee the information reflected in the financial statements is accurate and free from errors or fraud.

Upon completing the review, the accountant issues a report. The conclusion of a reviewed financial statement typically states:

> “Based upon our review, we are not aware of any material modifications that should be made to the accompanying financial statements.”

This statement does not mean that there are no errors in the financial statements, but rather that the CPA has not identified any significant issues that would necessitate changes. It’s important to note that materiality depends on the size of the company and the perspective of an independent investor. What may be considered immaterial for a small company might be significant for a larger entity.

A reviewed financial statement provides substantially more assurance than a compilation, but it is still not as comprehensive as an audit. Audited financial statements go a step further by expressing a formal opinion on whether the financial statements are free from material misstatements.

In conclusion, reviewed financial statements offer a valuable middle ground for privately held companies seeking more thorough financial reporting than a compilation but who may not need the full rigor of an audit.

By understanding the different levels of assurance in financial statements, businesses can make informed decisions about which type of financial statement best suits their needs. Whether opting for a compilation, review, or audit, each level serves a different purpose in ensuring transparency and reliability in financial reporting.