Co-authored by: Jessica Mendiola
A financial statement review provides an independent examination of your company’s financial records. Unlike a formal audit, which involves extensive testing and other procedures, a review relies on analytical procedures and inquiries.
A review is designed to provide reasonable assurance that the company’s financial statements are presented fairly and accurately, are free from material misstatements, and comply with the applicable accounting standards.
When Are Financial Statement Reviews Required?
Key stakeholders such as investors, lenders, bonding companies, and regulatory agencies often require a financial review to ensure transparency and accountability. Beyond compliance, financial statement reviews offer businesses an opportunity to identify potential issues early, enhance risk management, and demonstrate financial credibility to external parties.
The review process involves several key participants, including:
- Financial executives, who oversee the preparation of financial records and coordinate with external reviewers.
- External reviewers, such as independent accountants or auditors who examine the financial statements.
- External users, who rely on the review to assess the company’s financial health and make informed decisions.
Preparing for a Financial Statement Review
Accurate and up-to-date financial records are essential for a successful financial review. Accurate records form the foundation of any review and provide a clear picture of your company’s financial health. Without accurate records, you (and your stakeholders) risk drawing incorrect conclusions that can lead to poor business decisions.
The key steps to take before a review include:
- Reconcile accounts: Ensure all bank and credit card accounts are reconciled to identify any discrepancies or unauthorized transactions. Also ensure prepaid and accrued expenses are recorded to match expenses with the proper period.
- Examine your financial statements: Review your income statement, balance sheet, and cash flow statement regularly. Look for inconsistencies, unusual trends, or errors that could raise questions during a review.
- Assess project profitability: Examine project-specific financial data to determine profitability. Are projects delivering the expected return? This analysis can help you identify any cost estimates that need adjustment.
- Manage accounts receivable and payable: Monitor overdue receivables and payables. Timely collections and prompt payment of obligations are essential for maintaining positive cash flow and a strong credit rating.
- Evaluate inventory and equipment: Regularly evaluate inventory levels and the condition of equipment. This practice ensures asset values are reflected accurately on the balance sheet and helps identify obsolete or overvalued items.
Some of the key financial documents you’ll need to provide:
- Financial statements (income statement and balance sheet).
- Accounts receivable and payable aging reports.
- Contract schedules (work-in-process and completed).
- Inventory records.
- Fixed asset register.
- Tax returns.
- Contracts and agreements, including agreements for debt and leasing arrangements.
Organize these documents in a logical order, either by category or date, and ensure they are easily accessible. Digital storage solutions, such as cloud-based systems, can simplify this process by enabling quick retrieval and secure storage. Keeping records organized speeds up the review and demonstrates your commitment to transparency and efficiency.
Preparing for Potential Questions
During a financial review, you can expect questions about your financial statements, business practices, and overall financial health. Being well-prepared for these questions can be invaluable in instilling confidence in your review engagement team.
Consider the following common questions:
- Can you explain any significant variances in income or expenses?
- How do you account for bad debts or inventory write-offs?
- What are your processes for approving transactions and monitoring financial performance?
Prepare clear and concise answers to potential questions and be ready to provide documentation or context for any unusual items or trends in your financial statements. Transparent communication can help build trust and minimize follow-up questions or concerns. Likewise, being open about your company’s financial health allows reviewers to offer more meaningful feedback and recommendations.
While a financial review may seem daunting at first, proper preparation and a clear understanding of the process can turn it into an opportunity to enhance your business’s credibility, identify areas for improvement, and make more informed decisions. By following these guidelines, you will be well-equipped to navigate the review process with confidence and clarity.
To learn more about the benefits of financial reviews, contact us.
