What should a checklist for reviewing already-prepared financial statements — including a balance sheet — contain?

What is this check for, and what must it never be called?

It is a checking pass over statements someone else prepared, and it ends in acceptance or in a written list of exceptions and questions for the preparer.

It is not a professional engagement. Under the AICPA's standard for a CPA's review of financial statements (AR-C section 90), the accountant must be independent of the entity, performs primarily analytical procedures and inquiries, and obtains limited assurance, which the AICPA defines as less than the reasonable assurance of an audit. Under the AICPA's compilation standard (AR-C section 80), a compilation is not an assurance engagement, and the compilation report states that the accountant did not audit or review the statements.

So label the result as what it is, such as "internal check of the year-end statements prepared by our outside bookkeeper, exceptions attached", and never describe the statements as reviewed, compiled or audited because of it. Preparing the statements and auditing them are separate questions with their own checklists.

What must be in the package before line-by-line checking starts?

A missing statement, period or basis label changes what every later check means: without a basis label you cannot tell which balance-sheet expectations apply, and without a prior period the comparison checks cannot run. The glossary to the AICPA's accounting and review standards says the applicable financial reporting framework determines what constitutes a complete set of financial statements, so first ask which basis was used and where the statements name it: generally accepted accounting principles (GAAP), cash, tax or another. Then confirm each of these:

• Statements. FASB's presentation chapter of its conceptual framework lists the information users need, including assets, liabilities and equity at the end of the period, comprehensive income and cash flows during the period, and investments by and distributions to owners. Expect a balance sheet, an income statement and a statement of changes in equity. If there is no cash flow statement, ask the preparer in writing whether the stated basis requires one, and record the answer.
• Periods and dates. Every page names the entity and its date or period, all statements share one period end, and any prior-period column appears on every statement.
• Notes. Notes are present, or their omission is stated. Under the AICPA's preparation standard (AR-C section 70), a CPA who, after discussion with management, prepares statements omitting substantially all disclosures must disclose the omission in the statements or an accompanying disclaimer.
• What a CPA attached. When a CPA in public practice was engaged to prepare the statements and not to audit, review or compile them, AR-C section 70 requires a statement on each page that no assurance is provided, or else a disclaimer saying so. For compiled statements, ask for the compilation report, which AR-C section 80 requires to be in writing.
• Supplementary schedules. Extra schedules are labelled as supplementary information, which the AICPA glossary places outside the basic statements.

Each missing element opens the exception list, and checks that depend on it wait.

How does your access to the records change the checklist?

How much of the record base you can reach decides which checks you run yourself and which become questions for the preparer:

An owner or manager checking an outside bookkeeper's or accountant's work is usually on the second or third path. A preparer who cannot produce a standard schedule, such as a bank reconciliation, has given you an exception in its own right.

Where you can reach them yourself, get bank statements, lender statements and the business's own tax filings directly from the bank, the lender or your own records, not through the preparer. Record a check answered only by the preparer as "preparer's answer, not seen", not as passed, and keep it on the log until you have seen the schedule or statement behind it.

What does the checklist contain?

Run the agreement checks, 1 to 5, first: they cost least and locate a defect fastest. In the Needs column, "ask" means request the schedule or put the expected result to the preparer as a question, unless you can get the document directly, as above. Where the basis label does not show whether receivables and payables are recorded, ask the preparer which rows apply.

The Needs, Expected result and Exception columns are this checklist's working practice, not requirements of any accounting standard; a failed check is a question for the preparer, not a diagnosis. Several rows test relationships set out in OpenStax's Principles of Accounting: checks 1 to 3 in its section on preparing the statements, 4 in its cash flow section, 6 in its chapter 8 glossary, 7 and 11 in its chapter 7 glossary, check 7's allowance in its section on uncollectible accounts, 8 in its chapter 10 glossary, and 13 to 15 in its section on current liabilities; check 16 follows FASB's presentation chapter.

Why does agreement not prove the figures are right?

FASB's presentation chapter says that by their nature financial statements articulate with each other, which is what checks 1 to 4 test. Accounting software builds those links automatically, so a set produced in one run agrees with itself even when a sale was never recorded or a bill was entered twice. A failed agreement check is informative; a passed one shows only that the statements came from one set of records. Check 5 ties the statements to the ledger, but the ledger itself can be wrong; only the support checks, 6 to 16, test balances against schedules, counts and outside statements.

Which balances are exceptions because of their sign, presence, persistence or age?

A checklist built only on agreement never finds balances that should not exist. Question each of these:

• Sign. OpenStax's chapter 3 glossary defines a normal balance as the side that increases an account, and a contra account as one whose normal balance is opposite to that of its category. A negative asset or liability is on the wrong side unless it is a contra account, such as accumulated depreciation, which OpenStax's chapter 11 glossary describes as one. Ask whether it is an overdraft, customer payments not matched to invoices, a duplicate vendor payment or a posting error.
• Presence. The AICPA glossary describes the cash basis as recording cash receipts and disbursements, with modifications that have substantial support, so receivables or payables on a cash-basis balance sheet need an explanation the stated basis supports. Of any suspense, uncategorized, clearing or opening-balance account, ask: "What transactions make up this balance, why were they not posted to their proper accounts, and when will it be cleared to zero?" Of a balance with an owner, officer or related business, ask: "Who is the other party, what transactions created the balance and for what purpose, and is it a loan to be repaid, a contribution or a distribution?" The AICPA's review standard names related party transactions, including their purpose, among a CPA's inquiries.
• Persistence. OpenStax's chapter 4 glossary describes deferrals as prepaid expense and revenue accounts whose recognition waits until they are used or earned, so a prepaid, deposit or unearned-revenue balance that never changes suggests the release entries were never made. A tax liability that grows each period may mean payments were missed or posted elsewhere.
• Age. OpenStax's section on uncollectible accounts notes that the longer a receivable stays unpaid, the lower the probability it will be collected; check 7 tests receivables past terms against the allowance. Of an old payable, ask: "Is this still owed, or was it paid and never matched?" Of a reconciling item carried from an earlier period, ask why it has not cleared.

How deep should the income statement check go?

Check movement, composition and reasonableness, not individual transactions. The AICPA's review standard (AR-C section 90) lists comparisons a CPA may use, among them current statements against anticipated results such as budgets, ratios against expectations based on prior periods, and relationships such as expense by type as a percentage of sales. The same standard cautions that budgets and forecasts lack precision and can be manipulated by management to reflect desired results, so a line that matches budget is not right for that reason alone. These comparisons suit this check too: for each line, ask whether the change fits what you know happened. Before you start, write down the size of change you will question, and list every unexplained change above it.

Stop there. The same standard says a CPA's review does not contemplate testing accounting records by obtaining audit evidence through inspection, observation, confirmation or the examination of source documents, so tracing income-statement entries to invoices is beyond this check. The balance-sheet rows compare balances with schedules and outside statements; they do not test individual transactions.

Do not let the income statement take most of the time. OpenStax's chapter 5 glossary describes balance-sheet accounts as permanent accounts that transfer their balances to the next period, so an error there, and its counterpart in equity, persists until someone corrects it.

How do you compare periods without mistaking a regrouping for real change?

FASB's conceptual framework (Chapter 3, as amended) says consistency refers to using the same methods for the same items from period to period, and that for comparability like things must look alike and different things must look different. Before reading any variance, confirm that both columns use the same basis and captions and that the prior column matches the statements issued for that period, and ask the preparer to name every regrouping.

For example, suppose last year's cost of sales of 180,000 included rent of 24,000, while this year rent of 25,200 sits in operating expenses and cost of sales is 158,000. Cost of sales appears to have fallen 22,000. On this year's grouping, last year's cost of sales was 156,000, so it actually rose 2,000, and rent rose 1,200. Ask for the prior column restated on the new grouping before comparing.

Without a prior period, record that the comparison checks could not be run, and rely more on the balance-sheet support checks.

Which cutoff checks can you run from the statements?

Ask the preparer about significant transactions near the period end; the AICPA's review standard lists among a CPA's inquiries significant transactions, particularly those in the last several days of the reporting period. Also ask whether any entry was posted after the period end but dated inside it. The rest depends on the basis:

• GAAP, or any basis that records receivables and payables. OpenStax's chapter 4 glossary describes adjusting entries as updating the records at the end of a period for transactions not yet recorded, including accrued expenses incurred in the period with no money yet paid. Check that each recurring cost, such as rent, payroll, utilities and interest, appears once for every month, and that costs incurred but unpaid at the date appear as liabilities.

  OpenStax's chapter 8 glossary describes revenue recognition as accounting for revenue when the company has met its obligation on a contract. So also check that sales recorded in the last days of the period are for goods or services delivered by the date, and that work delivered but not yet billed at the date is recorded as revenue for the period.

• Cash basis. A bill or customer invoice still open at the date stays out of the statements, unless the stated modifications record it, and becomes an expense or income when paid. Check instead that receipts and payments fall on the correct side of the date by comparing them with bank statement dates, treating items listed as outstanding on the bank reconciliation at the date as timing differences, not cutoff errors.

What presentation points need checking?

Presentation decides how a reader interprets the figures. Check these points:

• Titles and basis. The AICPA's compilation standard (AR-C section 80) notes that unmodified titles such as balance sheet are generally understood to apply only to statements meant to present results under GAAP, that such titles may be used with appropriate modification for another basis, and that the description of another basis may be included in the titles, the notes or on the face of the statements. Cash- or tax-basis statements under unmodified titles such as balance sheet are an exception, as is any such set that does not describe its basis in the titles, the notes or on the face.
• Captions. FASB's presentation chapter calls line items holding classes of items as nearly homogeneous as possible a critical aspect of presentation. Check that each caption holds what its name says; owner draws, for example, belong in equity, since the same chapter treats distributions as decreasing ownership interests.
• Rounding and arithmetic. The unit is stated, and every column adds within the rounding the stated unit allows; a difference larger than rounding is an arithmetic error, which the AICPA glossary counts as an error.
• Comparatives. Each column carries its date or period and uses the same basis and captions.

How is each exception recorded and brought to an end?

Record every check, not only the failures: the check number, what you compared, the result, who did it and the date. The AICPA's review standard (AR-C section 90) describes a CPA's documentation as the record of procedures performed, evidence obtained and conclusions reached, and asks who performed the work and when it was completed. That content makes a sound record here, though keeping it does not make this check a review.

For each exception, add the amount, the question, who will answer it and by when. Send the list in writing: to an outside firm's contact, to an employee through whoever supervises them, and, for a predecessor's statements, to whoever keeps the books now, noting any explanation the predecessor gives as theirs. Each exception reaches one of three end states:

A verbal explanation that nobody wrote down clears nothing. Carry the log forward so the next period starts from this period's open items and accepted explanations.

What changes when the statements are going to a lender or other outside user?

Add a release step. Before sending, ask the recipient in writing whether they need statements prepared by management or ones a CPA has compiled, reviewed or audited; that is a separate decision about service level, and this check supplies none of those levels. Give presentation more weight, because the recipient sees only the package: the basis label, the notes or omission statement, and the comparatives. Clear every open exception, or disclose it in writing to the recipient, before release.