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financial statements may be adequate for entities that must
report their financial positions to third parties, such as
creditors or banks. Reviewed financial statements may also
be useful to business owners who are not actively involved
in managing their companies. A review consists of inquiry and
analytical procedures applied to financial statements. It provides
limited assurance that no material changes need to be made
to the financial statements.
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.
a review, a CPA may have to compile the financial statements; however,
in all cases the financial statements are considered the representation
of the entity's management, not of the CPA. Management must have
a sufficient understanding of the financial statements to assume
responsibility for them.
other factors differentiate a review from a compilation - the CPA
must remain independent of the client during a review, and all
appropriate disclosures must be included in the reviewed statements.
performing a review, 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 will then make inquiries concerning such financial statement-related
matters as accounting principles and practices, record keeping
practices, accounting policies, actions of the Board of Directors,
and changes in business activities. Finally the CPA will apply
analytical procedures designed to identify unusual items or trends
in the financial statements that may need explanation.
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.
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