Inquiry and Analytical Procedures Applied to Financial Statements.
A private company may engage a CPA to perform a review of its financial statements and issue a report that provides limited assurance that material changes to the financial statements are not necessary. With respect to reliability and assurance, a review falls between a compilation, which provides no assurance, and the more extensive assurance of an audit.
Before a review, the CPA may have to compile the financial statements; however, in all cases, the financial statements are management's statements, not the CPA's. Management must have a sufficient understanding of the financial statements to assume responsibility for them.
Three other factors differentiate a review from a compilation - the CPA must be independent of the client to perform a review, all appropriate disclosures must be included in the reviewed statements, and the client must provide the CPA with a letter of representation. In a representation letter, the client explicitly states its responsibility for the financial statements.
Here's What a Review Entails:
The CPA obtains a working knowledge of the industry in which the entity operates and acquires information on key aspects of the organization, including operating methods, products and services, and material transactions with related parties.
The CPA then makes inquiries concerning financial statement-related matters such as accounting principles and practices, record keeping practices, accounting policies, actions of the board of directors, and changes in business activities. Then the CPA applies analytical procedures designed to identify unusual items or trends in the financial statements that may need explanation. Essentially, a review is designed to see whether the financial statements "make sense" without applying audit-type tests.
Keep in mind that during a review, a CPA does not confirm balances with banks or creditors, observe inventory counting, or test selected transactions by examining supporting documents. However, in many instances, a review , with its limited assurance, may be adequate for a business or its creditors. If more assurance is necessary, the organization may need to engage a CPA to perform an audit.