What is a review engagement?

Definition

A review engagement is a CPA service that gives limited assurance on a set of financial statements. On the books this is not an account in the ledger; it is work done after the close, when an outside accountant reads the statements and issues a review report.

The work uses two main tools: questions to management, and comparisons of this period to last period. The review report then says the CPA is not aware of any changes that would need to be made for the statements to follow the common US rules.

A compilation presents the same statements with no assurance, and an audit gives an independent opinion. A review sits between those two services.

Where it shows up

Balance Sheet: Related to limited-assurance work on the statement.

P&L: Related to limited-assurance work on the statement.

Cash flow: Related to limited-assurance work on the statement.

See also: Compilation · Audit · Financial Statement Package

When you look at your Balance Sheet, a review does not add a new line. The same assets, liabilities, and equity sit there; the CPA has done limited work on those amounts.

The Income Statement is the same. Revenue and expenses stay as management recorded them; the review letter rides beside the statements, not on them.

The CPA reviews a Financial Statement Package. That bundle is what a bank or an owner actually receives after the year-end close.

A clean close makes the review faster. A messy close means more questions, more comparisons, and more time before the letter can go out.

How it works

Management finishes the close and gives the CPA the statements plus a Trial Balance. The CPA does not take over the general ledger; the company still owns every number.

Inquiry is the first tool. The CPA asks how cutoff was applied, how estimates were made, and whether anything unusual happened during the year.

Analytics are the second tool. The CPA compares this period to last period and to what the business should look like, then asks about swings that do not make sense.

If a swing is odd, the CPA asks more questions or requests a schedule. The CPA does not typically confirm cash with the bank or count parts on the floor; that deeper testing belongs to an audit.

The CPA may read a bank reconciliation or a source document that already exists. Those papers help the analytics; they are not the same as testing every balance from scratch.

When something is wrong, management is asked to fix the books. The review report is issued only after those fixes, and it still offers limited assurance rather than an opinion that the statements are fairly stated.

Internal controls may come up if a weak process could distort a number. The review is still not an exam of those procedures for their own sake.

The fee for this work is a professional cost on the P&L. It is the price of the letter, not a new statement line the review creates.

If the CPA cannot finish the inquiry and analytics, no review report is issued. Limited assurance is given only when that work was completed.

Example

Copperline Electric, an electrical contractor, closes December with $420,000 of revenue and $38,000 of materials. The bank that funds a $75,000 line of credit asks for a review of the December 31 statements, not an audit.

The CPA sits with the owner in January and asks how jobs in progress were billed at year end. The CPA also compares December materials to last December, when materials were $20,000 on similar job volume.

The $18,000 swing needs an explanation. The owner shows a late-December copper purchase still on the truck; inventory was never recorded.

Management books $18,000 of inventory and reduces materials expense. The statements change, and the CPA issues a review report.

The bank receives the package plus the letter. Copperline did not pay for a warehouse count or bank confirms; the comfort came from questions and analytics.

The next year the same bank asks for a review again. The statements are still management's; the CPA's letter is still limited assurance.

Common mix-ups

A review engagement is not a compilation. A compilation puts the books into a statement package with no assurance; a review adds questions, analytics, and limited assurance.

A review engagement is not an audit. An audit examines evidence and gives an opinion on whether the statements are fairly stated; a review does not.

A review is not a substitute for the company's own close. The year-end close still has to happen; the CPA reviews what management already prepared.

Related terms

• Compilation: An accountant's lowest level of service, presenting statements without assurance.
• Audit: An independent examination giving an opinion on whether statements are fairly stated.
• Financial Statement Package: The bundled set of statements and schedules delivered after a close.
• Flux Analysis: Explaining why each account moved compared with the prior period.
• Generally Accepted Accounting Principles: The common US rules for how financial statements are prepared.
• Professional Fees: Payments to accountants, attorneys, and other outside advisors.
• Year-End Close: The heavier close at fiscal year end, including closing entries and audit preparation.
• Internal Controls: The procedures that keep the books accurate and assets protected.