How to Review Financial Statements Step by Step



At first glance, the figures appeared sound—stable revenue, acceptable profitability, and a balanced closing position. However, a deeper review revealed increasing receivables, tightening cash flows, and expenses growing at a pace that warranted closer attention. Such insights often emerge only when financial statements are examined beyond surface-level figures. This underscores the importance of reviewing the financial statements, not merely to read the numbers, but to interpret what they reveal about a company’s performance, financial position, and future outlook.

Financial statement review meaning

Reviewing the financial statements is a structured analytical process aimed at evaluating the accuracy, completeness, and fairness of a company’s financial information. It involves examining the balance sheet, income statement, cash flow statement, and statement of changes in equity to assess financial performance and financial position.

Unlike routine reading or internal checks, reviewing financial statements focuses on identifying material misstatements, unusual trends, inconsistencies, and risks that may affect decision-making. This process is essential for management, auditors, investors, lenders, and regulators to ensure that the financial data reflects economic reality.

From an auditing perspective, reviewing financial statements is a core step that supports compliance with International Auditing Standards (ISA) and provides reasonable assurance that the statements are prepared in accordance with applicable accounting standards.

What Is a Financial Audit? How Are Financial Statements Examined?

A financial audit is an independent and systematic examination of an entity’s financial statements to determine whether they are free from material misstatement and prepared in accordance with applicable accounting standards. The primary objective of a financial audit is to provide reasonable assurance to users that the financial statements present a true and fair view of the company’s financial position and performance.

During a financial audit, financial statements are examined through a combination of analytical procedures, substantive testing, and evaluation of internal controls. Auditors assess supporting documentation, accounting records, and management estimates to verify the accuracy and reliability of reported figures. This examination process follows a risk-based approach, focusing on areas with higher exposure to errors or fraud.

Read Also: Internal vs External Ausits.

Requirements for Auditing Financial Statements (According to International Auditing Standards)

Auditing financial statements requires adherence to a structured set of professional and ethical requirements established by the International Auditing and Assurance Standards Board (IAASB). These requirements ensure consistency, quality, and reliability in audit engagements across different jurisdictions.

Key requirements for auditing financial statements include:

• Compliance with International Standards on Auditing (ISA) Auditors must plan and perform audits in accordance with the ISA to obtain reasonable assurance that the financial statements are free from material misstatement.
• Independence and Professional Ethics Auditors are required to maintain independence in both fact and appearance, in line with the International Code of Ethics for Professional Accountants.
• Professional Judgment and Skepticism Auditors must apply professional judgment and maintain professional skepticism throughout the audit, especially when evaluating estimates, assumptions, and management representations.
• Audit Planning and Risk Assessment The audit must be properly planned, including understanding the entity and its environment, identifying risks of material misstatement, and designing appropriate audit procedures.
• Sufficient and Appropriate Audit Evidence Audit conclusions must be supported by sufficient and appropriate evidence obtained through inspection, observation, inquiry, confirmation, and analytical procedures.
• Audit Documentation All audit work must be properly documented to provide a clear record of the procedures performed, evidence obtained, and conclusions reached.

What Are the Steps in Reviewing Financial Statements?

A financial statement review is a limited assurance engagement that provides users with confidence that there are no material modifications needed for the statements to be in accordance with accounting standards. Unlike a full audit, a review does not involve detailed testing of transactions or internal controls.

Key steps in the review process include:

1. Understanding the Entity Gather knowledge about the business, industry, and accounting policies to identify areas that may require attention.
2. Analytical Procedures Performing high-level analyses such as trend analysis, ratio analysis, and comparison with prior periods to detect unusual fluctuations.
3. Inquiry of Management Ask management targeted questions about significant transactions, estimates, or unusual events that may affect the financial statements.
4. Evaluation of Evidence Assess the evidence obtained through inquiries and analytical procedures to determine if any modifications are necessary.
5. Conclusion and Review Report Conclude whether, based on the review, the financial statements appear free from material misstatement and issue a review report with limited assurance.

Also Read about: Financial statement analysis: its importance and the most important steps

How to Review Balance Sheet Items

Reviewing balance sheet Items is a crucial part of assessing a company’s financial position. While a review engagement does not provide the same level of assurance as an audit, it helps identify unusual fluctuations, inconsistencies, or potential risks.

Key steps to review balance sheet items:

1. Assets

• Examine current and non-current assets for reasonableness.
• Look for unusual changes in cash, receivables, inventory, and fixed assets.
• Compare balances to prior periods and budgets.

2. Liabilities

• Review current and long-term liabilities for accuracy.
• Check for new or unusual payables, accruals, or debt balances.
• Confirm that obligations are properly classified and disclosed.

3. Equity

• Assess changes in share capital, retained earnings, and other reserves.
• Ensure that dividend distributions, stock issuances, or buybacks are accurately reflected.

4. Cross-Checking and Analytical Procedures

• Perform ratio analysis (current ratio, debt-to-equity ratio) to identify trends.
• Investigate any significant variances or unexpected balances.

5. Documentation of Findings

• Record observations, inquiries made, and any unusual findings.
• Determine if any adjustments or disclosures are necessary.

How to Review Income Statement Items

The income statement (also known as the profit and loss statement) reflects a company’s financial performance over a period, including revenues, expenses, and net profit or loss. Reviewing this statement helps identify unusual fluctuations, errors, or areas that may require further investigation.

Key steps to review income statement items:

1. Revenue

• Compare current revenues to prior periods and budgets.
• Investigate unusual changes, seasonal patterns, or one-off transactions.
• Verify that revenue recognition aligns with accounting policies.

2. Cost of Goods Sold (COGS)

• Ensure that COGS calculations are accurate and consistent with inventory records.
• Check for discrepancies between sales, purchases, and inventory adjustments.

3. Operating Expenses

• Review salaries, rent, utilities, marketing, and other expenses for reasonableness.
• Compare current expenses to prior periods and budget forecasts.

4. Non-Operating Items

• Examine gains or losses from investments, interest, or foreign exchange.
• Verify the classification of unusual or one-time items.

5. Net Profit or Loss

• Compare net profit margins to historical trends.
• Investigate any significant deviations and ensure proper disclosures.

6. Analytical Review

• Perform ratio analysis such as gross profit margin, operating margin, and net profit margin.
• Identify any unusual trends or variances that may require further investigation.

The Four Types of Review Reports

When reviewing financial statements, the reviewer issues a review report that provides limited assurance to users. While not as comprehensive as an audit report, the review report communicates the reviewer’s conclusion about whether anything has come to their attention that causes them to believe the financial statements are materially misstated.

The four main types of review reports are:

1. Standard Unmodified Review Report

• Indicates that, based on the review procedures, nothing has come to the reviewer’s attention that suggests the financial statements are materially misstated.
• Provides limited assurance but no opinion, like an audit.

2. Modified Review Report (Emphasis of Matter)

• Highlights a specific issue or note that users should be aware of.
• The financial statements are generally acceptable but may require attention to particular items.

3. Modified Review Report (Scope Limitation)

• Issued when the reviewer cannot obtain sufficient information on a specific area.
• Explains the limitation and its potential impact on the financial statements.

4. Adverse or Disclaimer Review Report Rare in practice but issued when the reviewer believes that the financial statements are materially misstated (adverse) or cannot form any conclusion due to severe limitations (disclaimer).

Best Practices for Reviewing Financial Statements

Reviewing financial statements effectively requires more than checking numbers—it demands analytical thinking, consistency, and attention to detail. Here are key best practices to ensure a thorough and reliable review:

1. Understand the Business and Industry

• Review the company’s operations, market conditions, and industry trends.
• Compare financial ratios and performance indicators with industry benchmarks.

2. Perform Analytical Reviews

• Analyze trends, variances, and ratios to detect unusual changes.
• Focus on significant fluctuations in revenue, expenses, and key balance sheet items.

3. Check Consistency Across Periods

• Compare current statements with prior periods for consistency.
• Investigate sudden or unexplained changes.

4. Verify Compliance with Accounting Standards

• Ensure the financial statements comply with IFRS, GAAP, or local accounting regulations.
• Confirm that disclosures are complete and understandable.

5. Document Observations and Findings

• Maintain clear notes on inquiries, anomalies, or unusual transactions.
• Use documentation to support conclusions and future reference.

6. Focus on High-Risk Areas

• Pay extra attention to estimates, provisions, depreciation, amortization, and contingent liabilities.
• Highlight these areas in your review report or notes.

Read Also about: A guide on how to prepare for an external audit using Wafeq's reports.

Reviewing financial statements is a critical practice for understanding a company’s true financial position and performance. It goes beyond reading figures to interpreting trends, assessing risks, and ensuring that financial information is reasonable, consistent, and aligned with accounting standards.

Whether for management decision-making, lender requirements, or investor confidence, a well-executed financial statement review provides clarity without the complexity and cost of a full audit. When done systematically, it becomes a powerful tool for stronger financial control and better business outcomes.

FAQs About Reviewing Financial Statements

What does reviewing financial statements mean?

Reviewing financial statements is a professional process that provides limited assurance that the financial statements are free from material misstatement. It relies mainly on analytical procedures and management inquiries, rather than detailed testing.

What is the difference between reviewing and auditing financial statements?

The key difference lies in the level of assurance and scope of work. A review provides limited assurance and does not include testing internal controls, while an audit provides reasonable assurance and involves extensive verification procedures.

Who needs a financial statement review?

Financial statement reviews are commonly required by small and medium-sized businesses, lenders, investors, and partners who need credible financial information without the cost of a full audit.

What financial statements are reviewed?

A review typically covers:

• Balance Sheet.
• Income Statement.
• Cash Flow Statement.
• Notes to the Financial Statements.

Does a financial statement review detect fraud?

A review is not designed to detect fraud, but it may highlight unusual trends or inconsistencies that warrant further investigation.

How often should financial statements be reviewed?

Most businesses conduct reviews annually, though some may opt for quarterly or semi-annual reviews depending on regulatory or stakeholder requirements.

Why is reviewing financial statements important for decision-making?

Because it improves confidence in financial information, helps identify risks early, and supports better strategic, operational, and financing decisions.