How to Know When a Reviewed Financial Statement is Better Than an Audit

Aug 4, 2021 | Audit

“Audit” is a word that strikes fear into most small business owners.

If it’s from the IRS, it means that the government is taking an extremely careful look into your finances and tax reporting. (Your level of participation in the tax process up to that point will determine your level of nervousness.)

If an audit is something you are needing to have done in order to stay compliant with industry regulations or an agreement with a lender, it means a lot of time and expense for you.

Neither scenario is usually anything that business owners look forward to.

Fortunately, there is another option that can help you avoid a lot of anxiety, time, and money. And it’s one that we get asked to do quite a bit at CRS CPA: Reviewed Financial Statements.

What is a Reviewed Financial Statement?

Reviewed Financial Statements (or “Financial Statement Reviews”) are done by accounting professionals on behalf of companies who need to produce a report of limited assurance that their financial records require no material modifications. “Limited assurance” simply means that the CPA is stating that “things appear to be in order based on what I have seen, and I realize that I haven’t seen everything.”

They’re often needed to demonstrate that an entity is in conformity with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Many times it is required in order for a business to be able to renew a license or verify that it meets particular industry standards.

Audit vs Review

You may be thinking, “that sounds an awful lot like an audit to me.” And the two are similar. However, Reviewed Financial Statements are a lot less time-consuming (translation: less expensive) and they do not require the accountant to dig as deep into your company’s financial records.

A full audit involves a top-to-bottom examination of your business’s financial statements, internal controls, and a physical inspection of its assets. The work is done solely by a CPA following very specific guidelines and using certain analytical and review procedures. Audits are expensive and time-consuming.

In a review situation, however, the management of the business is responsible for the compilation and presentation of the financial records. The CPA’s role is to have sufficient knowledge of the industry and the business in question to accurately “review” the documents provided. They tend to be more time-sensitive and deadline-driven (e.g. a lender needs the information soon or a license is about to run out), and because less work is involved, Reviewed Financial Statements tend to be a much more affordable option.

After reviewing the financial statements, the CPA will then reach one of two conclusions:

  1. The materials presented need no material modification. (i.e. “This company’s finances appear to be in order.”)
  2. The materials presented have been materially misstated. (i.e. “Something doesn’t add up here.”) In which case, one of two things will happen:
    1. Additional investigation will take place to be able to obtain limited assurance.
    2. The CPA will withdraw from the review.

What does a Reviewed Financial Statement involve?

Reviewed Financial Statements typically involve a comparison of a business’s current financial numbers to those of previous years. We will also look to see if our client’s results are on par with industry standards.

Several functions a CPA may perform in this type of service include:

  • Review all available financial statements to make sure they conform to the appropriate standards
  • Inquire about processes for recording transactions
  • Examine large transactions that occurred at the end of the reporting period
  • Inspect unusual circumstances that could have a significant impact on results
  • Conduct Ratio Analysis
    • Current assets vs current liabilities
    • Debt to Equity
    • Gross profit
    • Net profit
  • Look into findings that appear to be inconsistent

(Much more could potentially be included in this type of review. For a more in-depth look into the topic, check out this article on Reviewed Financial Statements from It’s a site with courses for practicing accountants, but it can be useful in providing business people with good accounting definitions.)

Bonus Option: Compiled Financial Statements

If an Audit is the most involved accounting review process and Reviewed Financial Statements are just below that, there is one other service that is another step down from both of those: Compiled Financial Statements.

With these, a CPA simply will help a business put together a presentation of their financial statements. It involves no efforts to provide any assurance with respect to the information included in those reports, and the CPA does not offer any opinion on them.

Lenders and creditors often prefer more assurances that financial reports accurately represent the position of the businesses they work with, so Compiled Financial Statements sometimes may not be enough. However, they can be a cost-effective option if the entities your business needs to report to are willing to accept them.

For Dependable Results, Hire Dependable People

When it comes to your business finances, you deserve to have accurate information that you can count on. How you present things like Reviewed Financial Statements to outside entities like lenders, creditors, and regulatory agencies says a lot about you and your business. Make sure you trust your results to a firm that knows what they’re doing.

At CRS CPA, we get it. Reports like these can be a matter of success or failure in many cases. We’re small business owners too, and for over 40 years we’ve been helping fellow entrepreneurs be confident that their finances are in good hands.

When you need a quality Audit, Review, or Compilation of your financial statements, take advantage of our dedicated Audit & Compliance Services.

Schedule a call to learn more!

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