Not every business needs the depth or expense of a full audit to confirm its financials. For many, a review engagement does the job. It is a more straightforward, affordable way to check that financial statements look accurate.
It’s ideal for small to mid-sized companies or privately held businesses, and a great way to give investors, lenders, or other stakeholders confidence in the financials without the high costs and intense process of a full audit.
For companies that want to go further into analyzing their financials, starting with a review engagement provides reliable data for those next steps.
Read: A Complete Guide to Financial Statement Analysis for Strategy Makers
What Exactly is a Review Engagement?
As mentioned, a review engagement is a way for companies to have their financial statements checked for obvious issues without the depth or cost of a full audit. It provides “limited assurance,” which means an accountant reviews the numbers to confirm they look reasonable without getting into every detail. This is often enough for investors or lenders.
Who Performs a Review Engagement?
Accountants or accounting firms usually perform them. They follow specific standards. In the U.S., the American Institute of Certified Public Accountants (AICPA) sets the guidelines for the process. Internationally, accountants follow the International Standard on Review Engagements (ISRE 2400).
What is “Limited Assurance”?
“Limited assurance” is a term used in accounting that means the accountant has looked into the statements and found no issues. They haven’t done the in-depth testing like they would in an audit, though. Limited assurance is the level of confidence provided by a review engagement. It means the accountant has checked the financials for obvious issues but hasn’t gone in-depth, so the confidence level is moderate, not as high as in an audit. This level of review is often enough to confirm that the numbers make sense, providing a reasonable level of confidence without the high cost of an audit.
What is “Negative Assurance”?
“Negative assurance” means that the accountant didn’t find anything alarming in the financials after the review. This is how the accountant expresses their findings. In their report, they’ll say, “Nothing came to our attention that suggests the financials are incorrect.” This phrasing reflects that they didn’t find issues but didn’t perform exhaustive tests. This isn’t a guarantee, but it’s often enough for small to mid-sized businesses or privately held companies looking to reassure stakeholders.
Review Engagement vs. Audit vs. Compilation
A review engagement offers a middle-ground option for financial review. An audit is the most thorough and it provides “reasonable assurance” through detailed testing and verification. It’s often required for public companies or regulated industries. A compilation is the simplest, with no assurance. It’s a basic presentation of financial data without any verification or analysis.
What Happens in a Review Engagement?
The core steps include talking to management, basic accuracy checks, analytical review, and sometimes light testing.
1. Talking to Management
The accountant starts by discussing the company’s financial statements and practices with management. This helps clarify the company’s reporting framework and identify any critical issues, such as large changes in revenue or unusual expenses.
For more on financial statement insights, see our guide on Financial Statement Analysis.
2. Checking Basic Accuracy
After understanding how the financials are prepared, the accountant does some high-level checks to ensure the numbers make sense according to accepted standards, without deep testing.
3. Doing an Analytical Review
The accountant uses simple analysis techniques like ratio and trend comparisons to spot unusual patterns or variances.
Using the right financial analysis tools can strengthen these checks, useful for both review engagements and deeper financial analysis. Balance sheet ratios are especially helpful for assessing liquidity and profitability.
4. Light Testing and Document Review
In some cases, the accountant may do some limited testing or review a few documents to back up what they found in the previous steps. This is far less detailed than an audit’s verification process.
For tracking changes over time, explore comparative balance sheets.
When Should a Business Consider a Review Engagement?
It can be a great choice for companies that need a financial check without the full depth and expense of an audit. Here are situations where it makes the most sense.
When Budget Matters
Review engagements are ideal for small to mid-sized companies or private businesses that need to reassure investors or lenders without paying as much as they would for an audit.
Example: A family-owned retailer needs a bank loan and goes for a review engagement to meet lender requirements affordably.
When Stakeholders Need Moderate Assurance
A review engagement is usually enough to give investors, lenders, or board members confidence that the financials look accurate, and it’s faster than an audit.
Example: A tech startup preparing for a funding round uses a review engagement to assure investors quickly without the depth of a full audit.
When Tracking Trends is Important
If seeing trends over time matters to your business, a review engagement can help keep the financials consistent. Tools like a comparative balance sheet make it easy to see how the numbers evolve.
Example: A manufacturer uses quarterly review engagements to monitor financial trends and make growth-oriented decisions.
When Your Industry is Not Too Regulated
Review engagements work well for companies in less-regulated sectors, like manufacturing or retail. In these fields, stakeholders may need some verification but they don’t need to go in-depth.
Example: A local food distributor uses a review engagement to assure stakeholders while avoiding the rigor of an audit.
When You Don’t Need a Full Audit
In industries without strict regulations, a full audit may not be necessary. Audits are often required for public companies, but private businesses usually find a review engagement gives them the assurance they need.
Example: A family-owned construction firm verifies its financials with a review engagement to satisfy a new partner’s requirements without a full audit.
The Downsides of Review Engagement
While review engagements are great for a general financial check, there are some areas they don’t fully cover.
Limited Assurance
A review engagement offers “limited assurance,” so it doesn’t involve the detailed testing you’d get with a full audit. It might miss complex issues that an audit could catch.
Narrow Focus
Review engagements focus on high-level checks, so they don’t examine every detail. Intricate issues or small errors might stay hidden.
It’s Best for Moderate Assurance
Review engagement might not be enough if a company needs a thorough audit. When investors have high expectations, or the industry is highly regulated, review engagement is not the best choice.
Conclusion
A review engagement is a great option for companies that need a reliable financial check without the full depth and cost of an audit. It offers “limited assurance”, making it ideal for small to mid-sized businesses, privately held companies, or industries with lower regulatory demands. It won’t catch every detail, but it provides enough confidence for stakeholders who need a basic level of assurance.
For companies looking for more in-depth verification or operating in highly regulated environments, an audit might be the better choice. But for many businesses, a review engagement strikes the right balance between confidence and cost, allowing them to move forward with clarity and control.
