What Happens During an Accounting Review?

 

An accounting review is an important process that helps businesses understand whether their financial records are accurate, consistent, and prepared in accordance with the appropriate accounting principles. While an accounting review is not the same as a full financial statement audit, it can provide business owners, managers, lenders, investors, and other stakeholders with greater confidence in the financial information being presented. For many business owners, the idea of an accounting review can seem complicated. Questions such as what documents are needed, how long the process takes, what an accountant actually checks, and what happens if an error is discovered are all common. Understanding the process can make an accounting review much less intimidating and can help a business prepare effectively. In this guide, we explain what happens during an accounting review, what accountants typically examine, how businesses can prepare, and what the final results of a review may mean for the company.

 

What Is an Accounting Review?

An accounting review is a professional examination of a company’s financial information performed by an accountant. The purpose is generally to provide a level of assurance that the financial statements do not contain material misstatements based on the procedures performed. Unlike an audit, an accounting review typically relies more heavily on inquiries, analytical procedures, comparisons, and discussions with management rather than extensive testing of individual transactions and internal controls. The exact procedures performed can vary depending on the business, the purpose of the review, the applicable accounting framework, and the requirements of the engagement. An accounting review may be useful when a company needs financial statements for a lender, potential investor, business partner, internal management purposes, or another stakeholder but does not require the higher level of assurance associated with a full audit.

Businesses looking for broader accounting support can also explore the professional services available through Lampkin CPA Advisors.

 

Accounting Review vs. Accounting Audit

One of the most important things to understand is that a review and an audit are not identical. Both involve an accountant examining financial information, but the scope, procedures, and level of assurance are different.

Accounting Review

An accounting review provides limited assurance. The accountant performs procedures designed to identify whether the financial statements appear to require material modification.

Review procedures commonly include:

• Inquiries of management and accounting personnel
• Analytical procedures
• Comparisons of current-period information with prior periods
• Investigation of unusual fluctuations
• Discussion of significant accounting matters
• Review of selected financial information and supporting documentation

 

Accounting Audit

An audit provides a higher level of assurance and generally involves more extensive procedures. Depending on the engagement, auditors may test transactions, examine supporting documentation, assess internal controls, confirm balances with third parties, observe physical assets, and perform other procedures to obtain sufficient appropriate audit evidence.

Therefore, a review is generally less extensive than an audit. However, that does not mean an accounting review is simply a quick check of a company’s books. A properly performed review still requires professional judgment and careful analysis.

 

Why Would a Business Need an Accounting Review?

There are several reasons why a business might undergo an accounting review. In some cases, the review is requested by an external stakeholder. In others, management may voluntarily request one to obtain greater confidence in the company’s financial reporting.

Common reasons include:

• Providing financial statements to a bank or lender
• Supporting a financing application
• Preparing for investment discussions
• Providing financial information to business partners
• Improving confidence in financial reporting
• Identifying potential accounting errors
• Preparing for a future audit
• Supporting business planning and decision-making
• Meeting contractual or organizational requirements
• Understanding the company’s financial position more clearly

An accounting review can also be valuable for growing businesses. As a company becomes larger, its accounting records often become more complicated. A review can help management identify areas where accounting procedures, documentation, or financial reporting could be improved.

 

Step 1: Planning the Accounting Review

The accounting review generally begins with planning. Before examining the financial statements, the accountant needs to understand the business and the purpose of the engagement. This can involve learning about the company’s industry, operations, revenue sources, major expenses, financing arrangements, accounting systems, and significant transactions during the reporting period. The accountant may also discuss the company’s accounting policies and determine which areas of the financial statements are likely to require particular attention. For example, a business that has recently purchased significant equipment may require additional attention around fixed assets and depreciation. A company experiencing rapid revenue growth may require closer consideration of revenue recognition and accounts receivable. Planning allows the accountant to understand where unusual changes or potential risks may exist.

 

Step 2: Requesting Financial Records

Once the review has been planned, the accountant will typically request financial information and supporting documentation from the business.

The exact list depends on the company and the engagement, but requested information may include:

• Balance sheets or statements of financial position
• Income statements or profit and loss statements
• Cash flow statements
• General ledger reports
• Trial balances
• Bank statements
• Accounts receivable reports
• Accounts payable reports
• Payroll information
• Fixed asset schedules
• Loan and financing documentation
• Tax records
• Inventory records
• Major contracts
• Supporting documentation for significant transactions

Providing complete and organized information can make the review process considerably more efficient. Missing records can create delays and may require additional questions or follow-up from the accountant.

 

Step 3: Understanding the Company’s Accounting System

The accountant will generally need to understand how the business records and processes financial transactions. This can include looking at the accounting software being used, the company’s chart of accounts, bookkeeping procedures, and the responsibilities of employees involved in financial reporting. The goal is not necessarily to perform the same detailed internal control testing that may occur during an audit. Instead, understanding the accounting system helps the accountant interpret the financial information and identify areas that may require additional attention. For example, if the company has recently changed accounting software, the accountant may ask how historical information was transferred and whether there were any issues during the transition.

 

Step 4: Reviewing the Financial Statements

One of the central parts of an accounting review is examining the company’s financial statements. The accountant may look at the balance sheet, income statement, cash flow statement, and related notes or schedules, depending on the reporting requirements. The accountant considers whether the information appears reasonable and whether there are unusual relationships, unexpected movements, or inconsistencies that require explanation. For example, suppose a company’s revenue increased by 40% compared with the previous year, but accounts receivable increased by 150%. That significant difference could prompt questions about collections, credit terms, revenue recognition, or a change in customer payment behavior. Similarly, a major decline in gross profit margin could lead to questions about pricing, inventory costs, supplier prices, or the classification of expenses.

 

Step 5: Performing Analytical Procedures

Analytical procedures are an important part of many accounting reviews. These procedures involve evaluating relationships and trends within financial information.

An accountant may compare:

• Current-year revenue with prior-year revenue
• Gross profit margins across reporting periods
• Operating expenses as a percentage of revenue
• Accounts receivable balances over time
• Accounts payable trends
• Payroll costs compared with employee numbers
• Inventory levels compared with sales
• Interest expense compared with outstanding debt
• Cash balances across reporting periods

The purpose is not simply to determine whether a number increased or decreased. The accountant considers whether the change appears reasonable based on the company’s circumstances. If an unusual fluctuation is identified, the accountant may ask management to explain the reason behind it and may perform additional procedures where appropriate.

 

Step 6: Asking Management Questions

Questions and discussions with management are a significant component of an accounting review. The accountant may communicate with business owners, directors, finance managers, bookkeepers, or other employees who have knowledge of the company’s financial activities. Questions can cover a wide range of topics, including unusual transactions, accounting policies, outstanding liabilities, significant contracts, changes in operations, legal matters, and events occurring after the reporting period. For example, an accountant might ask why an expense increased substantially compared with the previous year. Management may explain that the business opened a new location, hired additional employees, or incurred one-time professional fees. Providing clear explanations and supporting documentation can help the accountant determine whether unusual changes are reasonable.

 

Step 7: Investigating Unusual Transactions or Balances

If something appears inconsistent or unusual, the accountant may investigate further. This does not automatically mean that an error has occurred. Businesses regularly experience legitimate changes in their financial results.

However, unusual information may indicate that additional clarification is needed.

Examples could include:

• A significant increase in revenue near the end of the reporting period
• A large unexplained expense
• A substantial change in inventory
• Unusual movements in accounts receivable
• Significant new loans or financing arrangements
• Large related-party transactions
• Unexpected changes in gross margins
• Major asset purchases or disposals

The accountant may request additional records or explanations to understand these items.

 

Step 8: Reviewing Accounting Estimates

Businesses often have to make estimates when preparing financial statements. These estimates can include depreciation, allowances for doubtful accounts, inventory adjustments, accrued expenses, and other accounting estimates. During a review, an accountant may discuss significant estimates with management and consider whether the assumptions appear reasonable based on the information available. For example, a business may estimate that a portion of its outstanding customer balances will not be collected. The accountant may ask about the company’s experience with customer payments, aging reports, and any significant overdue balances. The purpose is to understand the basis for the accounting treatment and determine whether anything appears inconsistent with the available information.

 

Step 9: Identifying Potential Adjustments

An accounting review may identify items that need to be corrected or adjusted before the financial statements are finalized.

Examples can include:

• Incorrect expense classifications
• Missing accruals
• Incorrect depreciation calculations
• Unrecorded liabilities
• Bank reconciliation differences
• Incorrect accounts receivable balances
• Inventory adjustments
• Incorrect treatment of prepaid expenses
• Errors involving loan balances or interest

If an issue is identified, the accountant may discuss it with management and recommend an appropriate adjustment. This is one of the practical benefits of an accounting review. Finding an issue gives the business an opportunity to correct its records and improve the quality of its financial reporting.

 

Step 10: Considering Events After the Reporting Period

An accountant may also discuss significant events that occurred after the financial reporting period. These events can sometimes affect how financial statements should be presented or disclosed. For example, a company might experience a major fire, enter into a significant financing agreement, sell an important part of the business, or face a major customer default after year-end. The accountant may ask management about significant developments between the reporting date and the date the financial statements are completed.

 

Step 11: Completing the Review

After performing the necessary procedures and discussing significant matters with management, the accountant evaluates the information obtained during the engagement. The accountant considers whether the financial statements require material modification based on the results of the review. If issues remain unresolved, the accountant may communicate with management and request additional information or adjustments. Once the necessary work has been completed, the accountant can finalize the review and prepare the appropriate report.

 

What Does an Accounting Review Report Tell You?

The report resulting from an accounting review is different from an audit opinion. A review provides limited assurance rather than the reasonable assurance generally associated with an audit. The report communicates the nature of the accountant’s engagement and the level of assurance provided. This distinction is important when presenting financial statements to a third party. A lender, investor, or other stakeholder may have specific requirements regarding whether reviewed or audited financial statements are acceptable. Businesses should therefore confirm the requirements of the party requesting the financial statements before deciding which type of engagement is appropriate.

 

How Long Does an Accounting Review Take?

The length of an accounting review varies from business to business. A small company with straightforward financial records may require considerably less time than a larger organization with multiple locations, complex transactions, inventory, substantial debt, or complicated accounting arrangements.

Factors that can affect the timeline include:

• The size of the business
• The complexity of its transactions
• The quality of the accounting records
• The availability of supporting documentation
• The number of questions requiring follow-up
• The complexity of accounting estimates
• Whether adjustments are required
• How quickly management responds to information requests

One of the best ways to avoid unnecessary delays is to prepare financial records before the review begins.

 

How Should a Business Prepare for an Accounting Review?

Preparation can make the review process significantly smoother. Businesses should aim to ensure that their accounting records are complete, reconciled, and supported by appropriate documentation.

 

Reconcile Bank Accounts

Bank accounts should be reconciled before the review begins. Outstanding transactions, unexplained differences, duplicate entries, and other reconciliation issues should be investigated.

 

Review Accounts Receivable

Businesses should review outstanding customer balances and identify overdue accounts. Any potentially uncollectible amounts should be considered appropriately in the financial statements.

 

Review Accounts Payable

Companies should ensure that outstanding supplier invoices and other liabilities have been recorded in the correct reporting period.

 

Check Fixed Assets

Fixed asset records should be reviewed to make sure purchases, disposals, depreciation, and other adjustments have been recorded correctly.

 

Organize Supporting Documents

Important contracts, loan documents, invoices, bank statements, payroll records, and other supporting information should be easy to locate.

 

Prepare Explanations for Significant Changes

Management should be prepared to explain major changes in revenue, expenses, assets, liabilities, or cash flow. Having these explanations ready can save time during the review.

 

Common Problems Discovered During an Accounting Review

An accounting review can reveal a variety of accounting issues. Some may be relatively minor, while others could have a significant impact on the financial statements. Common issues include poor account classification, missing accruals, incorrect depreciation, unreconciled bank accounts, duplicate transactions, incomplete records, and errors in accounts receivable or accounts payable. Another common issue is inconsistency. For example, a company may have changed the way it classifies certain expenses without appropriately documenting or applying the accounting policy. The discovery of an accounting issue does not necessarily mean that the business has done something wrong intentionally. Accounting systems can become complicated as companies grow, and errors can occur even when employees are acting appropriately. The important point is that identifying errors allows them to be addressed.

 

What Happens If an Accountant Finds an Error?

If an accountant identifies a potential error, the issue will generally be discussed with management. The accountant may request supporting information to determine the nature and significance of the issue. If an adjustment is appropriate, management may update the accounting records before the financial statements are finalized. For example, suppose an expense was accidentally recorded as an asset. The accountant may explain the appropriate accounting treatment and recommend an adjustment so that the financial statements accurately reflect the transaction. In other situations, an apparent difference may have a perfectly reasonable explanation. The accountant’s role is therefore not simply to identify differences but to understand them and determine whether they require further action.

 

Benefits of an Accounting Review

An accounting review can provide several benefits beyond meeting an external requirement.

Greater Confidence in Financial Information

A review can provide management and external users with additional confidence in the financial statements.

Identification of Accounting Issues

The process can uncover errors, inconsistencies, or areas where accounting procedures could be improved.

Better Business Decisions

Reliable financial information helps owners and managers make better decisions regarding hiring, investments, expenses, pricing, financing, and growth.

Improved Financial Processes

The questions raised during a review can highlight weaknesses in bookkeeping procedures and encourage better documentation and financial controls.

Support for Financing

In some situations, reviewed financial statements can help satisfy the requirements of a lender or other external stakeholder.

 

How an Accounting Review Can Help a Growing Business

As businesses grow, their accounting needs often become more complicated. More employees, customers, suppliers, locations, assets, loans, and transactions can make financial reporting increasingly difficult to manage. An accounting review can provide an opportunity to step back and evaluate whether the company’s accounting records continue to accurately reflect its operations. It can also help management identify areas where processes need to become more formal. A business that once relied on one person to handle bookkeeping may eventually need clearer responsibilities, documented procedures, account reconciliations, approval processes, and stronger financial controls.

For additional guidance on managing the financial side of a growing business, visit Lampkin CPA Advisors to explore accounting and financial resources.

 

Questions to Ask Your Accountant Before an Accounting Review

Before beginning a review, business owners may want to clarify what will be included in the engagement.

Useful questions include:

• What financial statements will be reviewed?
• What accounting records will you need?
• What period will the review cover?
• What procedures will be performed?
• What level of assurance will the review provide?
• What is the expected timeline?
• What information should management prepare?
• Are there specific requirements from my lender or investor?
• How will potential accounting adjustments be handled?
• What report will be provided when the review is complete?

 

Accounting Review Checklist

Businesses can use a simple preparation checklist before an accounting review:

• Complete bank reconciliations
• Review accounts receivable balances
• Review accounts payable balances
• Update fixed asset schedules
• Review loan balances
• Check payroll records
• Review inventory records where applicable
• Record necessary accruals and prepayments
• Gather major contracts and agreements
• Organize supporting documentation
• Identify unusual financial fluctuations
• Prepare explanations for significant changes
• Communicate known accounting issues to the accountant

Final Thoughts: What Really Happens During an Accounting Review?

An accounting review is a structured process designed to provide limited assurance over a company’s financial statements. It typically involves understanding the business, reviewing financial information, performing analytical procedures, asking management questions, investigating unusual balances, considering accounting estimates, and addressing potential adjustments. The process is less extensive than an audit, but it can still provide valuable insight into the quality and consistency of a company’s financial reporting. For business owners, preparation is one of the most important parts of the process. Keeping accounting records organized throughout the year, reconciling accounts regularly, maintaining supporting documentation, and addressing accounting issues promptly can make a review considerably easier. Ultimately, the goal of an accounting review is not simply to produce a report. It is to help ensure that financial information is reliable enough for its intended purpose and to identify issues that may need attention before they become larger problems.

If your business is preparing for an accounting review or needs help understanding its financial reporting requirements, professional accounting guidance can help you determine the appropriate next steps. Visit Lampkin CPA Advisors for more information and accounting resources for businesses.