Review of Financial Statements by Members of the Institute of Chartered Accountants of India (ICAI)
1.Introduction
Reviews of financial statements are necessary because companies, especially listed ones, are required to publish quarterly results. Audits are resource-intensive and impractical every quarter, hence SEBI prescribes limited review. Reviews bridge the gap between management-prepared financial results and investor reliance. Example: Infosys publishes quarterly reviewed results, not audited, to maintain timeliness.
2. Key Definitions and Legal Provisions
Review Engagement is defined in SRE 2400/2410. It provides negative assurance. Limited assurance differs from reasonable assurance of audit. Material misstatement is defined under Ind AS. Legal framework includes ICAI SREs, SEBI LODR Regulation 33, Companies Act 2013. Expansion: Review is not a statutory audit but carries professional and regulatory responsibilities.
Review of financial statements / Review engagement
Limited assurance
Material misstatement
ICAI and SREs
SEBI LODR (Regulation 33 and related circulars)
Legal framework and professional liabilities
3. Objectives and Scope of a Review (as per SREs)
Objective: to provide limited assurance. Scope: inquiries, analytics, limited corroboration. Excluded: physical verification, confirmations. Expansion: Scope limitation reduces workload but increases risk, hence requires heightened scepticism.
Targeted inquiries from management, finance staff, governance bodies. Example: sudden spike in Other Income—ask if it includes asset sale.
– Obtaining an understanding of the entity and the applicable financial reporting framework sufficient to plan and perform the review.
– Performing inquiry of management and those charged with governance regarding accounting matters, significant transactions and subsequent events.
– Performing analytical procedures at an appropriate level of precision to identify unusual fluctuations, relationships or trends that may indicate a material misstatement.
– Considering whether any matters came to the practitioner’s attention that require further action or modification of the review conclusion.
– Preparing documentation of procedures performed, conclusions reached, and evidence supporting the review.
Core of review. Trend analysis, ratio analysis, budget vs actual. Example: margin drop from 40% to 32% in one quarter—requires detailed inquiry.
Reviews are vital for market stability, not substitutes for audits. Expansion: With rising scandals, ICAI and SEBI are tightening scrutiny, requiring vigilance to protect society.
4. The Practitioner’s Responsibilities — Overview
Responsibilities include compliance with standards, professional scepticism, planning, and engagement letters. Expansion: Example—if management claims sales increase, reviewer must corroborate via debtor days, inventory turnover.
– Compliance with SREs and relevant ICAI guidance.
– Maintaining independence, objectivity and professional scepticism.
– Planning the engagement, including understanding the entity and its environment
– Designing and performing appropriate inquiries and analytical reviews.
– Escalating exceptions and significant findings to the audit committee/board where applicable.
– Issuing the review conclusion in the format required by the applicable regulatory authority (for listed entities, as per SEBI circulars and formats).
Reviewer must study industry, business model, internal reporting. Example: textile exporter with sudden revenue jump—must assess if export incentives or genuine demand.
Reviews are vital for market stability, not substitutes for audits. Expansion: With rising scandals, ICAI and SEBI are tightening scrutiny, requiring vigilance to protect society.
5. How a Review Differs from an Audit — Emphasising the Distinctions
Differences: Level of assurance (limited vs reasonable), procedures (analytics vs substantive testing), evidence, reporting, liabilities. Expansion: Numerical example—Revenue ₹1000 crore. Audit tests invoices; Review compares trends.
Nature and level of assurance
Procedures applied
Extent of evidence
In an audit, evidence is persuasive, detailed and multi-sourced (confirmations, physical checks). In a review, evidence is limited (inquiries, analytics). Example: receivables jump 40%—in review: inquire, check ageing, verify some receipts; in audit: confirm balances directly.
Reporting language
Audit report is positive form (‘in our opinion…’). Review report is negative form (‘nothing has come to our attention…’). Reason: review provides limited assurance only. SEBI mandates formats under Regulation 33, ICAI SREs provide wording. Example: modified review report can add Emphasis of Matter for receivable uncertainties.
Legal/regulatory obligations
ICAI SRE 2400/2410 mandatory; non-compliance = misconduct. SEBI LODR 33 requires quarterly reviews. Companies Act, 2013 mandates annual statutory audit. PSU/bank reviews may involve CAG or RBI oversight. Expansion: review not statutory audit but carries regulatory consequences.
6. Detailed Review Procedures — Practical Guidance
Steps: Planning, Understanding Entity, Analytical Procedures, Inquiries, Corroboration, Documentation. Expansion: Reviewers must use rigorous analytics, not merely rely on management statements.
Core of review. Trend analysis, ratio analysis, budget vs actual. Example: margin drop from 40% to 32% in one quarter—requires detailed inquiry.
Planning and engagement acceptance
Plan by identifying risk areas, industry specifics. Check independence, competence, resources. Engagement letter defines scope, limitations, reporting. Example: telecom operator—AGR dues risk; letter clarifies review won’t verify network assets.
Understanding the entity
Reviewer must study industry, business model, internal reporting. Example: textile exporter with sudden revenue jump—must assess if export incentives or genuine demand.
Analytical procedures
Core of review. Trend analysis, ratio analysis, budget vs actual. Example: margin drop from 40% to 32% in one quarter—requires detailed inquiry.
Inquiries
Targeted inquiries from management, finance staff, governance bodies. Example: sudden spike in Other Income—ask if it includes asset sale.
Corroborative follow‑up
When analytics raise anomalies, perform limited verification (invoices, reconciliations, subsequent receipts). Example: check bank reconciliation for large unusual items.
Documentation
Document procedures, inquiries, evidence, and conclusions. Example: if EBITDA drop explained as higher raw material cost—keep price schedules, not just verbal reply. ICAI peer review may check this.
7. Responsibilities to Different Stakeholders
Investors: protect decision-making. Management: independence and professionalism. Board: communicate findings. Regulators: ensure compliance. Employees: protect jobs. Creditors: ensure reliable reporting. Society: safeguard taxpayer money. Expansion: Responsibilities extend beyond narrow stakeholders.
a) Responsibility to Investors and Financial Markets
Investors rely heavily on quarterly results. Reviewer must ensure anomalies are investigated. Example: hiding ₹500 crore contingent liability misleads investors. Failure reduces confidence.
b) Responsibility to the Company and Management
Reviewer should cooperate but stay independent. Provide constructive feedback. Example: repeated delay in debtor provisioning—flag in management letter.
c) Responsibility to the Board / Audit Committee
Reviewer must communicate material uncertainties, fraud suspicions, and related party transactions. Example: PSU energy firm subsidy receivables overdue 2 years—report to audit committee.
8. Consequences of a Defective Review — Legal and Market Repercussions
Consequences: ICAI disciplinary action, civil liability, SEBI penalties, reputational loss. Expansion: Case—telecom AGR dues understated, reviewer fails, SEBI penalises auditors, investors suffer.
Professional disciplinary action
Civil liability
Regulatory action by SEBI
Reputational damage and market impact
9. Numerical Illustration — Illustrative Review Engagement (Hypothetical)
Illustrations show how analytics reveal anomalies. Case studies: Banking (NPA recognition), PSU Energy (CWIP risks), Telecom (AGR dues). Expansion: Reviewer must identify, seek evidence, and conclude appropriately.
Background:
Analytical procedures designed:
Core of review. Trend analysis, ratio analysis, budget vs actual. Example: margin drop from 40% to 32% in one quarter—requires detailed inquiry.
YTD revenue comparison: Current quarter YTD revenue INR 380 crore vs prior year YTD INR 360 crore — increase of 5.56%. Expected range based on seasonality and order book: 3% to 8%.
2. Gross margin: Current YTD gross margin 36% vs prior year YTD 39% — decrease of 3 percentage points. Significant decline requires inquiry.
3. Receivable days: Current trade receivables INR 120 crore; average daily sales (annualised) = (500 crore / 365) * 90 days approximate — compute and compare.
4. Inventory turnover slowed from 5x to 3.6x — potential obsolescence risk.
Sample inquiries and corroborative steps:
Targeted inquiries from management, finance staff, governance bodies. Example: sudden spike in Other Income—ask if it includes asset sale.
– Inquiry: Management explains gross margin decline due to rise in raw material cost and one‑time product mix change. Obtain purchase price variance schedule and sample invoices for corroboration.
– Inquiry: Receivables increase explained by delayed collections from two major customers; obtain ageing schedule and subsequent receipts evidence for major balances.
– Analytical follow‑up: Recompute margin impact: increase in raw material cost of 4% on material portion of cost leading to 1.5% margin reduction — corroborated via supplier price lists.
Conclusion:
Reviews are vital for market stability, not substitutes for audits. Expansion: With rising scandals, ICAI and SEBI are tightening scrutiny, requiring vigilance to protect society.
10. Case Study 1 — Illustrative (Composite) Scenario of Detection by Review
Illustrations show anomalies and governance failures. Expansion: Reviewer must design procedures, identify risks, and escalate issues.
Facts:
Review work:
Outcome:
11. Case Study 2 — Real‑World Example and Lessons (High‑level)
Illustrations show anomalies and governance failures. Expansion: Reviewer must design procedures, identify risks, and escalate issues.
While high‑profile failures such as Satyam (2009) are primarily audit failures, they underscore the broader point: if interim reviews and other practitioner engagements fail to detect or report material manipulations, markets and investors suffer heavy consequences. The Satyam case demonstrated systemic corporate governance failure and collusion which even a robust audit struggled to detect before the fraud surfaced. Lessons for reviewers include exercising heightened scepticism over related party transactions, verifying corroborating evidence for material adjustments, and ensuring timely communication with audit committees and regulators where public interest is at stake.
12. Reporting and Wording — Practical Considerations
Reports follow SRE wording and SEBI formats. Negative assurance language is key. Expansion: Example of modified review report adding emphasis of matter if receivable uncertainties persist.
SRE‑compliant wording
Modifications and emphasis of matter
Interaction with SEBI reporting formats
13. Quality Control, Peer Review and Firm Policies
Firm policies, EQCR, peer review are essential. Expansion: Example—ICAI suspension of CA firm for peer review failure in PSU audit.
Quality control requirements are integral to maintaining review quality. Firms should adopt robust practice manuals, internal review processes, partner review of workpapers, engagement quality control review (EQCR) where applicable, and periodic internal and external peer reviews. For those performing limited reviews and audits of listed entities, adherence to ICAI’s peer review requirements and maintaining up‑to‑date continuing professional education are essential to meet professional standards and regulatory expectations.
Firm policies, EQCR, peer review are essential. Expansion: Example—ICAI suspension of CA firm for peer review failure in PSU audit.
14. Practical Problems, Red Flags and Professional Scepticism
Problems: revenue spikes, related party issues, accounting policy shifts. Expansion: Textile company exporting at year-end without shipping—red flag.
Common red flags on reviews
When to expand scope
15. Recommendations for Practitioners
Recommendations: Adhere to SREs, clear engagement letters, risk-based analytics, escalate to audit committees, continuous education. Expansion: Create sector-specific review checklists.
1.Strictly adhere to SRE 2400 and SRE 2410 requirements and ICAI guidance.
2. Maintain clear engagement letters and set expectations about the nature and limitations of a review.
3. Design risk‑based analytical procedures and document reasons for material variances.
4. Keep audit committees fully informed; escalate issues promptly.
5. Maintain proper documentation and implement an internal quality control checklist for reviews.
6. Participate in peer review programs and continuing professional education to remain current on regulatory and technical changes.
Core of review. Trend analysis, ratio analysis, budget vs actual. Example: margin drop from 40% to 32% in one quarter—requires detailed inquiry.
Firm policies, EQCR, peer review are essential. Expansion: Example—ICAI suspension of CA firm for peer review failure in PSU audit.
16. Conclusion
Reviews are vital for market stability, not substitutes for audits. Expansion: With rising scandals, ICAI and SEBI are tightening scrutiny, requiring vigilance to protect society.
Appendix: Select Statutory and Regulatory References
(End of article)
**_Sector-specific Case Studies: Banking, PSU Energy, Telecom_**
The following sector-specific case studies are illustrative and constructed to demonstrate how review engagements should be tailored to sectoral risk profiles. The numerical data are hypothetical for teaching and illustrative purposes; practitioners should use client-specific and market-sourced data in real engagements.
1.Banking Sector — Case Study: Mutual Bank Ltd. (Hypothetical)
Illustrations show anomalies and governance failures. Expansion: Reviewer must design procedures, identify risks, and escalate issues.
Background: Mutual Bank Ltd. is a mid-sized scheduled commercial bank with total business (deposits + advances) of INR 40,000 crore. The bank reports quarterly results and engages a reviewer for limited review of interim financial information. The banking sector has unique review considerations—interest income recognition, NPAs classification, provisioning coverage, related party exposures and regulatory compliance (RBI guidelines).Review Focus and Analytical Procedures:
Core of review. Trend analysis, ratio analysis, budget vs actual. Example: margin drop from 40% to 32% in one quarter—requires detailed inquiry.
1.Interest income recognition — perform analytics on yield on advances and compare with prior periods and budget; reconcile spread trends.
2. Asset quality — perform trend analysis on NPAs, ageing of restructured accounts, and review provisioning policy changes. Request detailed ageing, provisioning matrix and subsequent receipts.
3. Related party exposures — inquire and obtain confirmations for large exposures to related entities; verify board approvals and disclosures.
4. Liquidity and regulatory ratios — validate calculation of CRR/SLR, LCR (if applicable), and disclosure compliance under RBI circulars.
Illustrative Analytical Example (Banking):
Assume the bank’s reported Net Interest Margin (NIM) YTD is 3.2%, whereas prior-year NIM was 3.6%. The reviewer performs a decomposition:
– Change in yields on advances: -20 bps impact
– Increase in cost of deposits: +10 bps impact
– Mix shift to lower-yielding retail advances: -10 bps impact
The reviewer seeks supporting schedules for yield movement and corroborates via test computations on sampled loan accounts and float reconciliations. If unexplained variance remains, consider expanded procedures or reporting an emphasis of matter.
2. PSU Energy Sector — Case Study: Bharat Power Co. (Hypothetical)
Illustrations show anomalies and governance failures. Expansion: Reviewer must design procedures, identify risks, and escalate issues.
Background: Bharat Power Co. is a state-owned generation company with significant capital expenditure, long-term PPAs, and receivable risk from state distribution utilities. Key review risks include capitalisation of projects, impairment of fixed assets, receivable recoverability from state utilities, and subsidy receivables.
Review Focus and Procedures for PSU Energy:
1.Capitalisation and CWIP — inspect contracts, progress certificates, and test a sample of vendor invoices capitalised; evaluate management’s basis for capitalisation vs. expensing.
2. Impairment indicators — analytical review of plant load factor (PLF), tariff changes, and fuel cost pass-through; where indicators exist request management impairment assessment.
3. Receivables from Discoms — examine ageing, correspondence, and confirmability; check invocation of bank guarantees and provisioning approach.
Illustrative Analytical Example (PSU Energy):
If trade receivables aged >180 days are INR 800 Cr and historical recovery rate is 60%, expected recoverable amount = 480 Cr implying an additional provision requirement of 320 Cr. The reviewer will inquire management on recoverability assumptions and corroborate with subsequent receipts or agreements with state governments.
3. Telecom Sector — Case Study: ConnectTel Ltd. (Hypothetical)
Illustrations show anomalies and governance failures. Expansion: Reviewer must design procedures, identify risks, and escalate issues.
Background: ConnectTel Ltd. is a private telecom operator with significant spectrum liabilities, high capex, revenue from subscriptions and interconnect, and wholesale/retail mixes. Review risks include revenue recognition over bundled contracts, provisioning for AGR-related contingencies, and assessment of useful lives for network assets.
Review Focus and Procedures for Telecom:
1.Revenue Recognition — perform disaggregated analytics on subscription, VAS and interconnect revenues; reconcile subscriber metrics (ARPU, churn) to billing systems.
2. Contingent Liabilities — review management’s assessment of AGR-like exposures; request legal confirmations and correspondence with regulators.
3. Capitalisation and Useful Lives — test samples of network asset additions and check depreciation policies for consistency and reasonableness.
Expanded Section: Responsibilities to Different Stakeholders (Detailed)
Investors: protect decision-making. Management: independence and professionalism. Board: communicate findings. Regulators: ensure compliance. Employees: protect jobs. Creditors: ensure reliable reporting. Society: safeguard taxpayer money. Expansion: Responsibilities extend beyond narrow stakeholders.
The reviewer’s responsibilities vary by stakeholder group and require tailored communication and documentation standards. The following expands the earlier section:
Document procedures, inquiries, evidence, and conclusions. Example: if EBITDA drop explained as higher raw material cost—keep price schedules, not just verbal reply. ICAI peer review may check this.
Investors and Financial Markets:
– Communicate the limited nature of assurance clearly; avoid language that may be construed as providing reasonable assurance.
– Promptly report any matter indicating material misstatement or suspected fraud to the audit committee and, where required by law or regulation, to the regulator.
Company and Management:
– Maintain objectivity; document management representations and corroborative evidence for significant estimates.
– Where management refuses to provide requested information, consider the impact on the review conclusion and document the scope limitation.
Reviews are vital for market stability, not substitutes for audits. Expansion: With rising scandals, ICAI and SEBI are tightening scrutiny, requiring vigilance to protect society.
Board / Audit Committee:
– Communicate significant findings, material uncertainties (e.g., going concern), and adjustments identified during the review. Ensure minutes of meetings and written communications are retained in the workpapers.
– Recommend remedial governance actions where necessary (e.g., independent forensic review, strengthening internal controls).
Formatting and Tone Adjustments Applied
– Headings have been emphasized using bold, italics and underlining for clarity.
– Tables inserted to present key numeric indicators for each sector case study; these are illustrative and aid analytical reviews.
Illustrations show anomalies and governance failures. Expansion: Reviewer must design procedures, identify risks, and escalate issues.
– The overall tone remains formal and professional, suitable for distribution to audit committees and board members.
**_Comparison of Audit vs Review_**
**_Responsibilities to Different Stakeholders_**
**_Review Process Flow Diagram_**
Author Bio
