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Review Engagement

Updated on March 29, 2024
Article byShrestha Ghosal
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Review Engagement?

A review engagement is a process where a practitioner reviews a company’s financial statements for any material misstatements. The review engagement procedures provide limited assurance to the financial statement users. However, it gives them confidence about the accuracy of the financial statements.

Review Engagement

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Review engagement of financial statements are also known as limited assurance or negative assurance. A practitioner conducts them after a company prepares its financial statements and verifies them to be accurate. Then, a practitioner analyses and reviews the financial statements to provide a certain level of assurance in the negative assurance report.

Key Takeaways

  • A review engagement is when a practitioner reviews and analyses a company’s financial statements. They may also check the company’s internal financial control system. It is also known as limited assurance and negative assurance.
  • This procedure aims to identify any material misstatements in a company’s financial records and report them in the negative assurance report.
  • The negative assurance report contains information about any error or flaw noticed by the practitioner in the financial statements.
  • This engagement provides limited assurance to the intended financial statements users. It is performed to increase the user’s confidence in the correctness of the financial statements.

Review Engagement Explained

A review engagement is when an auditor reviews and analyses a company’s financial statements for material misstatements. The review engagement procedures are done after a firm has completed preparing its financial statements and has verified their accuracy. The review engagement report provides limited assurance to the financial statement users about its accuracy. It is different from an audit because the review methods are less intensive. As a result, a practitioner cannot assert the fairness of the financial records.

Review engagement in audit involves several steps where the auditor investigates and analyses the company’s financial statements. Then they provide limited assurance in the negative assurance report. The negative assurance report is prepared to moderately assure the financial statement users that the auditor did not find anything flawed or erroneous in the company’s financial statements. In addition, it informs the user if the financial statements act outside the accounting standards.

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Review engagement in audit involves the following parties where each party has a specific role:

#1 – Company’s Management Team

A company’s management team prepares its financial statements according to the rules specified by the financial reporting framework. The management is also accountable for having a robust control system, ensuring the financial statements are free of material misstatements. 

#2 – Practitioner

This individual is the figure who is entrusted with the responsibility to perform the engagement procedures and prepare the review engagement report. In addition, they conduct their own review and analysis methods to ensure that the financial records are free of significant errors.

#3 – Financial Statement Users

They are the individuals who are concerned with the company’s financial statements. They base their decisions on those records, and any financial statement inaccuracies will impact them. Therefore, the review engagement financial statements are prepared to increase their belief in the precision of the company’s financial records.

Types

The types of this engagement are as follows:

#1 – Attestation Engagement

Attestation engagement means the practitioner must review the records prepared by the company’s management. They may also have to check the control systems the management team has established. This engagement type requires the practitioner to review the client’s information and express his opinion. The auditors do not need to evaluate the information provided to them. These engagements offer a moderate level of assurance.

#2 – Direct Engagement

Direct engagement is the type where the practitioners must review and evaluate the client’s information. Then they must present their conclusion in the negative assurance report. The practitioner directly reports to the intended financial statement users through this engagement. The users rely on these direct reports for making their economic decisions. These reports, too, provide a moderate level of assurance to the financial statement users.

Examples

Let us understand this concept with the following examples:

Example #1

Suppose Arcane Ltd. is a company that manufactures computers. The company’s management prepared the financial statements for the fiscal year 2022 and hired a practitioner to perform review engagement. The practitioner prepared a negative assurance report based on his observations and analysis. The following information is a part of the negative assurance report:

“The management informed us that inventory has been stated at its cost, which is more than its net realizable value. Based on our review, except for the effects of the overstatement of inventory, nothing has come to attention that causes us to believe that the accompanying financial statements do not give a true and fair view per the International Accounting Standards.”

This is an example of a review engagement.

Example #2

In May 2010, the American Institute of Certified Public Accountants, or AICPA’s Accounting and Review Services Committee (ARSC), announced that there would be significant changes to the review engagement standard practices. The changes included:

  • Disclosing the reasons for the lack of independence.
  • Applicable financial reporting framework.
  • Separating compilation guidance from review guidance.
  • Clarifying review performance procedures.

The new standards came into effect from December 2010 onwards. This is an example of a review engagement.

Audit vs Review Engagement

The differences are as follows:

  • An audit involves an in-depth examination of a company’s financial records. It involves more rigorous steps to determine the correctness of the financial statements. A negative assurance involves examining only the credibility of the company’s financial statements. It only identifies the existence of any material misstatements in the financial records.
  • An audit provides reasonable assurance to the intended financial statement users, whereas a negative assurance offers limited assurance to the users.
  • The audit has a much broader scope as compared to negative assurance.
  • An audit is a far more expensive and time-consuming process as compared to negative assurance.

Review Engagement vs Compilation Engagement vs Notice To Reader

The differences are as follows:

  • Review Engagement: This engagement type involves a limited examination that a practitioner performs on a company’s financial statements. It provides a moderate or a limited level of assurance to the financial statement users about the financial statements’ correctness. In addition, it is used to determine any significant misstatements in financial records.
  • Compilation Engagement: In this type of engagement, a practitioner provides a basic summary of a company’s financial statements. The practitioner does not examine the company’s financial records or internal control system. As a result, these engagements do not assure the intended financial statement users. However, it is a cheaper process compared to negative assurance as the procedures are less time-consuming and not as meticulous.
  • Notice To Reader: Notice to reader statements are compiled information that the company provides to its intended financial statements users. It is intended to put the readers on notice. However, it does not give the readers any opinion or assurance of the information’s accuracy.

Frequently Asked Questions (FAQs)

Who can prepare review engagement financial statements?

A certified public accountant or a CPA performs the negative assurance financial statements. First, the company’s accountants prepare the financial statements and verify their accuracy. Then the practitioners review and analyze the financial statements to record and report their observations and provide limited assurance to the users. Finally, they present their conclusion in the negative assurance financial statements.

What procedures are required for a review engagement?

The review procedures that a practitioner performs on the negative assurance process are as follows:
– The practitioner inquires the accountants about the accounting standards and practices they use while preparing the company’s financial statements.
– They interrogate the management or its representatives on the accuracy of the financial statements. 
– They examine the company’s internal financial control system that the management implemented.

Does review engagement require independence?

No, a negative assurance report does not require the auditor to be independent. Since negative assurance provides limited assurance on the financial statements, the auditor does not necessarily need to be independent. However, they must be a licensed practitioner.

This article has been a guide to what is a Review Engagement. We compare it with audit, notice to reader and compilation engagement, its types, and examples. You may also find some useful articles here –