A review engagement is also known as a limited assurance or negative engagement. Auditors conduct a review engagement after an accountant’s completed an audit of a company’s financial statements, and therefore, the auditor provides limited assurance on the accuracy of the financial statements. During the engagement, the auditor performs inquiry and analytical review procedures to provide a moderate level of assurance required to provide a negative assurance report.
In a negative assurance report, the auditor states whether they found anything that causes them to believe that the assertion of one party does not present a true and fair view. The auditor is required to disclose if they encountered any information during the engagement that causes them to believe that the financial statements do not present a true and fair view of the company or the financial statements do not comply with the specific accounting standards. A review engagement differs significantly from an audit engagement since the former provides less assurance to the intended user.
A review engagement is a type of engagement that provides a limited level of assurance that a company’s financial statements comply with the applicable financial reporting framework.
It gives users limited assurance on the accuracy or correctness of financial statements.
A review engagement takes less time than an audit engagement since there is less effort involved.
How It Works
A review engagement is preferred when the company’s financial statements have already been prepared and certified to be accurate, and the company engages an external accountant to review the financial statements. Since the financial statements have already been certified as accurate, the external accountant is required to provide negative assurance that the financial statements are free of material misstatements.
During the review, the accountant performs analytical procedures to gain a better understanding of the figures. A review engagement is less intensive in terms of the procedures performed by the accountant. Therefore, the accountant cannot express an opinion on the fairness of the financial statements.
Main Parties in a Review Engagement
The following are the main parties in a review engagement and the roles they place in the process:
The management is responsible for preparing the main financial statements, i.e., balance sheet, income statement, and cash flow statement, in accordance with the financial reporting framework.
Also, the management is required to implement internal control systems to help in preparing financial statements that are free of material misstatement. They should also provide the relevant financial data to help the accountant prepare the financial statements in a timely manner.
The individual performing a review engagement must be a licensed practitioner. The practitioner is required to obtain evidence directly rather than rely on evidence provided by third parties. He/she must also perform procedures to reach a conclusion on whether anything came to their attention that causes them to believe that the financial statements are not prepared in accordance with the applicable financial reporting framework. The review procedures that the practitioner is required to perform include:
Inquiries on the accounting practices used by the company
Representations from management on the accuracy of the financial statements
Management responsibility for internal control systems
Management responsibility to detect and prevent fraud
Information on subsequent events
Knowledge of fraud
Ratios and relationships of recorded amounts
Analytical procedures on comparisons
Receipt of appropriate financial information
Procedures for recording financial information
3. Intended users
The intended users of the financial statements can be shareholders, investors, creditors, etc. The review engagement is conducted with the goal of enhancing the user’s confidence in the financial statements.
Since the financial statements have already been audited and certified, the auditor’s role is to provide negative assurance on whether the reviewed financial statements comply with the applicable reporting standards, and whether they are free from material misstatement. The financial statements are considered materially misstated if they contain errors, fraud, or omissions that can potentially influence the user’s economic decisions.
Review Engagement vs. Audit Engagement
A review engagement is considered weaker than an audit engagement. In an audit engagement, the auditor is required to perform more rigorous procedures before issuing a positive assurance. The auditor must understand the company’s internal control systems and perform verification, substantiation, inquiries, and analytical procedures.
After gathering the appropriate evidence through the abovementioned procedures, the auditor expresses an opinion on whether the financial statements are prepared in accordance with the applicable financial reporting framework, and if they paint a true picture of the financial position of the company.
Depending on the findings of the audit, the auditor may provide an unqualified opinion, qualified opinion, or an adverse opinion. An unqualified opinion means that the auditor is satisfied that the financial statement reflects a true and fair view of the company’s position and that they are free from material errors or fraud.
A qualified opinion is issued when the auditor is unable to issue an unqualified opinion due to a departure from the financial reporting framework or scope of limitation. The auditor must disclose specific issues related to the qualification, or where there is a material departure from GAAP rules.
An adverse opinion is issued when the auditor concludes that the departures from the financial reporting framework are so significant that he/she believes the financial statements are not fairly stated.
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