A review of financial statements by an independent auditor or public accountant involves making inquiries of managementand other key personnel of the Company and performing analytical procedures on the financial information to concludewith limited assurance that the financial statements of a Company are free of material misstatement.
The objective of a review of financial statements is to allow the practicing professional to indicate whether, based onthe use of procedures, he or she has reached a conclusion that leads him or her to believe that the financialinformation has been prepared in all material respects in accordance with the accounting framework in force.
The scope of a review of financial statements includes planning through interviews with management and then, based onthe professional judgment of the independent auditor or public accountant, determining the most appropriate proceduresto express a conclusion on the Company’s financial statements.
Procedures in a review of financial statements
Financial statement review procedures generally include :
- Obtaining knowledge of the Company’s business and the sector in which it operates.
- Inquiry into the accounting principles and practices applied by the Company.
- Inquiries regarding accounting records procedures, classification and grouping of transactions, collection ofinformation for disclosure of financial statements and their preparation.
- Inquiries regarding all material statements included in the financial statements.
- Analytical procedures designed to identify unusual relationships and specific items.
- Inquiries regarding resolutions adopted by the General Shareholders’ Meeting, Board of Directors, Committees,among others.
- Inquiries with accounting personnel regarding accounting and financial matters.
Conclusion of a review of financial statements
At the end of the procedures executed by the independent auditor or public accountant, a report is prepared stating theconclusions based on the evidence obtained during the execution of the work. In the report of a review of the financialstatements, the report describes the scope of the assignment, so that the user can understand the nature of the workperformed and to clarify that an audit has not been performed and, therefore, does not express an audit opinion.
Is a review of financial statements the same as a financial audit?
A review of financial statements does not satisfy the requirements of a financial audit, because, in a review,procedures are executed that end with a conclusion with limited certainty. The main procedures in a review are theinquiry (understanding of the nature of the business and accounting practices) and analytical procedures applied to thefinancial statements.
A financial audit, apart from obtaining an understanding of the business, also includes an understanding of theCompany’s internal control over financial reporting. Based on that understanding, the auditor performs tests of controland substantive tests to evaluate whether the balances in the financial statements are fairly stated in accordance withcurrent accounting standards. Upon completion of the audit procedures, the independent auditor issues an opinion on thereasonableness of the financial statements in conformity with the accounting standards in force.
Finally, a review of financial statements provides reasonable assurance regarding the reasonableness of the financialstatements, whereas a financial audit involves more extensive procedures for expressing an opinion on the Company’sfinancial position and performance.
When to request a review of financial statements?
A Company may request a review of financial statements when it does not yet feel prepared to undertake a financial auditbecause it might have an adverse opinion on the reasonableness of the financial statements.
With a review of the financial statements, the Company will be able to improve its accounting practices in generalterms; however, it is clarified that accounting errors may exist because of the moderate security.
The cost of servicing a financial statement audit is less than the cost of a financial audit because the proceduresperformed are limited.