Getting a First Review Engagement Through Without Drama
A first review engagement goes badly for one reason: the company treats it as something that happens to them rather than something they prepare for. This is the preparation, item by item.
The call usually comes from a lender. Sometimes an investor, a franchisor, a bonding company or a new shareholder agreement. The wording is casual: “we will need reviewed statements this year.” The company has been getting a compilation for six years, assumes this is the same thing with a different cover page, and finds out in week three of fieldwork that it is not.
The gap is not difficulty. It is evidence. A review engagement asks you to support balances that nobody has ever asked you to support before, and it asks in a fixed order. If the supporting schedules already exist because you built them during the year, the engagement is quiet. If they do not, the engagement becomes six weeks of the practitioner asking and your office manager searching.
Know which engagement you are actually being asked for
| Engagement | Canadian standard | What the practitioner provides | Typical trigger |
|---|---|---|---|
| Compilation | CSRS 4200 | No assurance. Financial information compiled from information you provide, with a note describing the basis of accounting used. | Internal use, or a lender who does not require assurance |
| Review | CSRE 2400 | Limited assurance, expressed as a conclusion in the negative form: nothing has come to the practitioner’s attention causing them to believe the statements are not prepared, in all material respects, in accordance with the applicable framework. | Bank covenant, investor, franchisor, bonding, shareholder agreement |
| Audit | Canadian Auditing Standards | Reasonable assurance, expressed as an opinion. | Larger lending facilities, regulated entities, some funders and acquirers |
Ask the party requesting it to confirm in writing which of the three they need, and confirm the reporting framework at the same time. Discovering in February that the bank wanted an audit, or that they expect statements under a framework different from the one you have been using, is the most expensive kind of late discovery.
What a review is, in practical terms
A review is built primarily on inquiry and analytical procedures. The practitioner is not testing your internal controls and is not sampling transactions the way an audit would. They are asking well-aimed questions, comparing your numbers against expectations, and following up wherever something does not behave the way the business you described would behave.
That has two consequences for how you prepare.
Your explanations are evidence. In an audit, a document can settle a question. In a review, the practitioner’s expectation and your explanation of the variance are much of the file. Vague explanations get followed up. Specific ones do not.
Analytical anomalies drive the whole engagement. If gross margin moved four points, if an expense line doubled, if receivables aged out, if revenue jumped in the final month, the practitioner will ask. If a surprise number is genuinely a surprise to you as well, the engagement expands. Run your own analytical review before they run theirs, and have the explanation ready.
The practitioner will also be independent of you, and will confirm that independence formally. Independence is a requirement for a review engagement, and it constrains what other work they can do for you. Sort that out at the engagement letter stage rather than in the middle.
The preparation timeline
| When | What happens | Owner |
|---|---|---|
| Three to four months before year end | Confirm the engagement type and reporting framework in writing with the party requesting it. Select the practitioner. | Owner or GM |
| Two to three months before | Engagement letter signed. Scope, timing, fee basis, deliverables and who provides what are all settled here. | Owner and practitioner |
| Two months before | Receive or request the PBC list. Assign every line to a named person with a date. | Finance lead |
| Six weeks before | Clean-up pass: clear suspense and clearing accounts, reconcile every balance sheet account, resolve old items in AR and AP. | Bookkeeper |
| Two weeks before year end | Plan the year-end inventory count if inventory is material. The practitioner may want to attend or at least discuss the procedure. | Operations and finance lead |
| Year end | Hard cut-off. Nothing posted to the year after the ledger is closed, without a written adjustment. | Finance lead |
| Two to four weeks after year end | Close the year, produce a final trial balance, complete every lead schedule, run your own analytical review. | Finance lead |
| Fieldwork | Respond to queries within one to two business days. Keep a single query log. | Finance lead |
| After fieldwork | Review adjustments, management representation letter, final statements, sign-off. | Owner and practitioner |
The single largest driver of both cost and duration is turnaround time on queries. A practitioner who waits four days for each answer is repeatedly reloading your file from scratch.
The PBC list
PBC means “prepared by client.” Every practitioner issues their own, and it will look roughly like this. Build these during the year and the request becomes a transfer rather than a project.
Governance and entity documents
| Item | Format | Owner | Why they want it |
|---|---|---|---|
| Articles of incorporation and any amendments | Owner | Confirms the entity, share classes and structure | |
| Minute book, including directors’ and shareholders’ resolutions for the year | PDF or scan | Owner | Dividends, share transactions, borrowing authorizations, officer changes |
| Shareholder register and share capital detail | Schedule | Owner | Agrees equity to the record |
| Shareholder agreement | Owner | Rights and obligations that can affect presentation | |
| Organization chart of related entities | One page | Owner | Identifies related parties before the questions start |
Financial statement support
| Item | Format | Owner | Why they want it |
|---|---|---|---|
| Final trial balance for the year and the comparative year | Excel | Finance lead | The starting point of the entire file |
| General ledger detail for the full year | Excel or PDF | Finance lead | Enables targeted enquiry |
| Journal entry listing for the year | Excel | Finance lead | Manual entries are read first |
| Prior year statements and the prior practitioner’s adjusting entries | Finance lead | Confirms opening balances agree | |
| Bank reconciliations at year end, all accounts | Bookkeeper | Cash is where the file usually starts | |
| Bank statements at year end, all accounts | Bookkeeper | External evidence for cash | |
| Bank confirmation authorization | Signed form | Owner | Sent by the practitioner, not by you |
| AR aged listing at year end, agreed to the ledger | Excel | Bookkeeper | Aging drives the collectability question |
| Notes on any receivable past normal terms | Memo | Finance lead | Pre-empts the allowance discussion |
| AP aged listing at year end, agreed to the ledger | Excel | Bookkeeper | Completeness of liabilities |
| Inventory count sheets, costing basis, obsolescence review | Excel and scans | Operations | Existence, valuation and the lower of cost and net realizable value question |
| Capital asset continuity schedule with additions, disposals and depreciation | Excel | Finance lead | Additions over threshold will be vouched to invoices |
| Invoices for significant capital additions | Finance lead | Support for the additions column | |
| Prepaid expense schedule | Excel | Bookkeeper | Amortization basis and reasonableness |
| Deferred revenue schedule by customer or contract | Excel | Finance lead | The single most-questioned balance in a service business |
| Accrued liabilities schedule with the basis for each accrual | Excel | Finance lead | Completeness of expenses |
| Loan agreements, amortization schedules and year-end balances | PDF and Excel | Finance lead | Principal and interest split, current and long-term classification |
| Lease agreements, all of them | Finance lead | Classification and measurement under your framework | |
| Payroll year-end reports and remittance confirmations | Bookkeeper | Payroll liability completeness | |
| Sales tax filings for the year, agreed to the ledger balance | Bookkeeper | Reconciles the payable and identifies prior period adjustments | |
| Corporate tax provision or the prior filed return | Practitioner or tax preparer | Tax accounts and continuity | |
| Related party transaction summary | Schedule | Finance lead | Disclosure requirement, and always asked about |
| Shareholder or director account detail, every movement | Excel | Finance lead | Read line by line, every time |
| Insurance policies in force | Office manager | Assets, coverage and contingencies | |
| Significant contracts signed during the year | Owner | Revenue recognition and commitments | |
| Legal correspondence and any pending claims | Owner | Contingencies and subsequent events | |
| Budget or forecast for the coming year | Excel | Owner | Feeds the going concern discussion when relevant |
Analytical support you should prepare unrequested
Nothing improves an engagement more than handing over the explanations before they are asked for.
- Month-by-month revenue for the year and the comparative year, with a written explanation of any month that moves more than your threshold.
- Gross margin by month and by service line or product line, with explanations for shifts.
- Every expense line, current year versus prior year, with a one-line reason for anything that moved materially.
- Headcount by month against total payroll cost.
- A short memo on anything unusual during the year: a large contract, a new line of business, a change in pricing, a legal matter, a new lender, a change in accounting treatment.
Working paper index
Whether or not your practitioner asks for it, organizing your own file the way theirs is organized cuts fieldwork noticeably. A lettered index by balance sheet area is the convention.
| Ref | Area | Lead schedule contents |
|---|---|---|
| A | Cash and bank | Every account, reconciliation, statement, outstanding items |
| B | Accounts receivable | Aged listing, allowance analysis, subsequent receipts |
| C | Inventory | Count sheets, costing, obsolescence, cut-off testing support |
| D | Prepaids and other current assets | Schedule with opening, additions, amortization, closing |
| E | Capital assets | Continuity schedule, additions support, disposals, depreciation policy |
| F | Accounts payable and accruals | Aged listing, accrual schedules with basis, subsequent payments |
| G | Sales tax and payroll liabilities | Filings, remittances, reconciliation to the ledger |
| H | Debt and leases | Agreements, amortization schedules, current and long-term split, covenant calculations |
| J | Equity and related parties | Share capital, dividends, shareholder account detail, related party summary |
| R | Revenue | Recognition policy memo, deferred revenue schedule, cut-off support, contract listing |
| X | Expenses | Analytical review with explanations |
| Z | Wrap-up | Adjusting entries, management representation letter, subsequent events memo, statements |
Each lead schedule footsheet says one thing: the balance per this schedule agrees to the trial balance, with the reference. That is the whole discipline.
The questions you will be asked, so answer them first
- How is revenue recognized, and why is that the right point? Write a short policy memo describing the arrangement types you sell, when control transfers or the service is delivered, and how deposits and multi-period arrangements are handled. One page, kept current.
- What moved and why? Every significant variance in your own analytical review.
- What are the related party transactions? All of them, including the ones that felt too small to mention and the ones that were never invoiced.
- Are there receivables that will not be collected? Have a view, supported by the aging and by what you know about the customers.
- Is inventory saleable at above cost? Obsolescence is the valuation question, and “we counted it” does not answer it.
- What happened after year end? Subsequent events matter up to the date of the report. New financing, a lost customer, a legal development, a large loss, an asset sale. Volunteer these.
- Is there any reason to doubt the company can continue operating? If there is any tension around cash, covenants or a concentrated customer, it is better raised by you than discovered by them.
- Have there been any changes in accounting treatment? Including a chart of accounts rebuild, a change in cut-off practice, or a reclassification in comparatives.
The management representation letter
At the end of the engagement, management signs a letter representing, among other things, that the records are complete, that all related party transactions and all liabilities have been disclosed, and that subsequent events have been communicated. Read it properly. It is not a formality, and the signature is yours, not the practitioner’s. If any sentence in it is not true, the time to say so is before signing, not after.
Where first engagements actually go wrong
| Failure | Consequence | Prevention |
|---|---|---|
| Opening balances do not agree to the prior year statements | Everything stops until it is resolved | Reconcile to the prior practitioner’s final adjusting entries before fieldwork |
| Suspense and clearing accounts still carry balances | Every one becomes a query | Clear them in the six-week clean-up |
| Deferred revenue has no schedule | The most likely material adjustment in a service business | Build the schedule monthly, not annually |
| Shareholder account is a single lumpy balance | Line-by-line questions and a slow week | Detail every movement as it happens |
| No cut-off discipline at year end | Cut-off testing produces adjustments | Hard close, lock the period |
| Slow query responses | Fee and duration both climb | One query log, one owner, two-day turnaround |
| The practitioner is asked to prepare the schedules they are reviewing | Independence problem and a much larger bill | Prepare your own schedules, or have someone other than the practitioner prepare them |
That last row is the one worth internalizing. In a review engagement the practitioner is independent of you, and the more of your own file you can produce, the cleaner and cheaper the engagement is. A company that arrives with a complete working paper file has effectively already done the part that costs money.