Financial statements review audit is a process of reviewing the financial statements to check whether the financial statements are prepared in the expected way or not and if they meet the expected amount of true and fair presentation and is free from material misstatements or not. This review is more focused review of the financial statements based on the objective of the person engaging the auditor to perform the same.
In other words, review of financial statements is a type of negative engagement where auditors are engaged to review the financial statements of the entity.
This kind of service is normally required when an entity borrows money from the bank. And the banks, as part of their policy require the entity to provide financial statements reviewed by the external auditor. Sometimes financial statements review is requested by management for their internal use.
Under financial statement review, the auditor obtains limited assurance that there are no material modifications that need to be made to an entity’s financial statements for them to be in conformity with the applicable financial reporting framework (such as GAAP or IFRS). A review does not require the auditor to obtain an understanding of internal control, or to assess fraud risk, or other types of audit procedures. Consequently, a review does not provide the auditor with assurance that he has become aware of all the significant matters that would normally have been discovered and disclosed in an audit.
Following are some of the procedures performed as part of the review process:There are also a number of review steps that can be utilized in specific areas based on the expectation of the person engaging the auditor.
Conduct a ratio analysis with historical information or forecasted data, or industry results
Investigate findings that appear to be abnormal or inconsistent
Investigate unusual or complex situations that may impact reported results
Investigate significant transactions occurring near the end of the accounting period
Follow up on questions that arose during previous reviews
Inquire about material events that occurred after the date of the financial statements
Investigate significant and closing journal entries
Review communications from regulatory agencies
Read the financial statements to see if they appear to conform with the applicable financial reporting framework like IFRS or US GAAP.
Review the management reports of any accountants who reviewed or audited the entity’s financial statements in prior periods
If the auditor believes that the financial statements are materially misstated, he should perform additional procedures to obtain a limited assurance that there is no need to make material modifications to the financial statements. If the statements are materially misstated, the accountant must choose between disclosing the issue in the report that accompanies the financial statements, or of withdrawing from the review.
Specific review areas include:
Cash and bank– Are cash accounts being reconciled regularly? Have checks written but not mailed been classified as liabilities? Is there a reconciliation of inter company transfers?
Receivables– Is there an adequate allowance for doubtful accounts? Are any receivables pledged, discounted, or factored? Are there any non-current receivables and whether they have been classified appropriately or not?
Inventory – Are physical inventory counts performed and a reconciliation of the same with the stock as per books of accounts are performed or not and how was the difference been accounted in the books? Were consigned goods considered during the inventory count? What cost elements are included in the cost of inventory?
Investments – How are fair values determined for investments? How are gains and losses recorded following the disposal of an investment? How do you calculate investment income?
Fixed assets – How are gains and losses on the disposal of fixed assets recorded? What are criteria for capitalizing expenditures? What depreciation methods are used?
Intangible assets – What types of assets are recorded as intangible assets? Is amortization being appropriately applied? Have impairment losses been recognized?
Accounts payable and accrued expenses – Are there sufficient expense accruals? Are loans properly classified?
Long-term liabilities – Are the terms of debt agreements properly disclosed? Is the entity in compliance with any loan covenants? Are loans properly classified as short-term or long-term?
Contingencies and commitments – Are there guarantees to which the entity has committed itself? Are there any material contractual obligations? Are there liabilities for environmental remediation?
Equity– What classes of stock have been authorized? What is the par value of each class of stock? Have stock options been properly measured and disclosed in the financial statements?
Revenue and expenses – What is the revenue recognition policy and is it in line with IFRS or US GAAP or not? Are expenses recorded in the correct reporting period? Have the results of discontinued operations been properly reported in the financial statements?
How Spectrum Auditing can help you?
An expert audit firm like Spectrum offers frills free options to choose your financial statements review work. Spectrum has been helping organizations fulfil its major tasks by being a value addition to its client in its growth. Our expert guidance and recommendations along with best practices for an efficient management has been our core strength.
Spectrum Auditing& Accounts is one of the leading audit, accounting and service provider in UAE. Call us today for a free consultation on Treasury Management offer.
Tel: +971 4 269 9329 | mob: +971 50 986 6466 |