Review of financial statements: Overview, definition, and example
What is a review of financial statements?
A review of financial statements is an evaluation process where a company’s financial statements, such as the balance sheet, income statement, and cash flow statement, are examined by an external or internal party to assess their accuracy and compliance with relevant accounting standards. Unlike an audit, which involves a more in-depth examination and verification of financial data, a review is generally less detailed and focuses on identifying material misstatements or inconsistencies. The goal of a review is to provide a limited assurance that the financial statements are free from significant errors or discrepancies, offering a higher level of credibility to investors, creditors, and stakeholders.
For example, an accountant may conduct a review of a company's quarterly financial statements to ensure that they are in accordance with Generally Accepted Accounting Principles (GAAP).
Why is the review of financial statements important?
The review of financial statements is important because it helps ensure transparency, accuracy, and reliability in a company’s financial reporting. By having financial statements reviewed, businesses can provide greater confidence to investors, lenders, and other stakeholders that the financial information being presented is trustworthy. A review can help detect errors or inconsistencies in financial statements before they lead to more significant issues or financial discrepancies. It also provides an independent perspective on the financial health of the business, helping management make informed decisions and comply with regulatory requirements.
Understanding the review of financial statements through an example
Let’s say a small business is preparing for a bank loan application and needs to provide recent financial statements. To increase credibility, the business hires an independent accountant to conduct a review of its financial statements. The accountant examines the statements, checks for any obvious errors or misstatements, and confirms that the financial data appears to be in line with generally accepted accounting standards. While the accountant doesn’t conduct a full audit, the review provides some assurance to the bank that the financial statements are reasonably accurate.
In another example, a non-profit organization prepares its annual financial statements for its board of directors and potential donors. The organization decides to have its financial statements reviewed by an external auditor to ensure that they accurately reflect the organization’s financial condition, which in turn reassures donors that the funds are being properly managed.
An example of a review of financial statements clause
Here’s how a review of financial statements clause might appear in an agreement or engagement letter:
“The Company agrees to have its financial statements for the fiscal year ending [insert date] reviewed by an independent Certified Public Accountant (CPA) in accordance with applicable accounting standards. The CPA will provide a report stating that, based on the review, the financial statements appear to be free from material misstatements and in compliance with generally accepted accounting principles (GAAP).”
Conclusion
A review of financial statements is a crucial process for ensuring the accuracy and reliability of a company’s financial reporting. While less detailed than an audit, it offers a level of assurance that financial statements are free from material misstatements, helping to foster trust among investors, creditors, and other stakeholders. For businesses, it provides an independent review of their financial health, supporting decision-making and maintaining transparency in financial communication.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.