Review of Interim Financial Information
A review of interim financial information provides a level of assurance that is substantially less than an audit. Rather than expressing a positive opinion, the auditor (or accountant) expresses negative assurance — stating that nothing came to their attention that causes them to believe the interim financial information is not presented fairly in accordance with the applicable framework. Understanding the nature, scope, and reporting requirements of interim reviews is important for the AUD exam, particularly the distinction between AICPA and PCAOB standards.
This section covers the applicable standards, the nature of limited assurance, the scope of an interim review, reporting content and modifications, the relationship between the interim review and the annual audit, SEC quarterly reporting, and key differences between AICPA and PCAOB approaches.
Applicable Standards
| Standard | Applies To | Scope |
|---|---|---|
| AU-C 930 (AICPA) | Nonissuer interim financial information when the auditor also audits the annual financial statements | Review of interim financial information |
| AS 4105 (PCAOB) | Issuer interim financial information (typically 10-Q filings) | Review of interim financial information |
Under AU-C 930, the accountant performing the interim review must also be the auditor of the annual financial statements (or have been engaged to audit the annual financial statements). This ensures the reviewer has sufficient knowledge of the entity's internal control and accounting practices to perform a meaningful review.
Nature of a Review — Limited Assurance
An interim review provides limited assurance (also called negative assurance), which is substantially less than the reasonable assurance provided by an audit.
| Characteristic | Audit | Review of Interim Financial Information |
|---|---|---|
| Assurance level | Reasonable (high but not absolute) | Limited (moderate) |
| Type of opinion/conclusion | Positive opinion ("presents fairly…") | Negative assurance ("nothing came to our attention…") |
| Primary procedures | Inspection, observation, confirmation, recalculation, reperformance, analytical procedures, inquiry | Primarily inquiry and analytical procedures |
| Testing of controls | Yes (if relying on controls) | Generally not performed specifically for the review |
| Scope of work | Extensive | Significantly narrower |
| Cost and time | Higher | Lower |
Example: Bear Co.'s auditor performs a review of the company's quarterly financial statements. Rather than confirming receivables, counting inventory, or testing journal entries, the auditor primarily asks management questions about the quarterly results and performs analytical procedures to identify unusual fluctuations. The conclusion states: "Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information."
Remember the key phrase for negative assurance: "Nothing came to our attention" or "We are not aware of any material modifications." This language signals limited assurance — the auditor is not saying the statements are fairly presented, only that nothing was found to suggest otherwise.
Scope of the Review
Primary Procedures
The review of interim financial information consists primarily of:
- Inquiries of management and others within the entity
- Analytical procedures applied to the interim financial data
Specific Inquiry Areas
| Area of Inquiry | Examples |
|---|---|
| Accounting practices | Have there been any changes in accounting policies or practices? |
| Unusual transactions | Are there any unusual or complex transactions during the period? |
| Subsequent events | Are there events after the interim period that affect the financial information? |
| Related parties | Have there been any new related-party transactions? |
| Litigation and claims | Are there any new or changed legal matters? |
| Going concern | Are there conditions that raise substantial doubt about the entity's ability to continue as a going concern? |
| Fraud | Has management become aware of any fraud or suspected fraud? |
| Compliance | Are there any known violations of laws or regulations? |
Analytical Procedures
The auditor applies analytical procedures to the interim financial data, including:
- Comparing current interim data with prior interim periods
- Comparing current interim data with corresponding prior-year interim periods
- Comparing current interim data with budgets or forecasts
- Evaluating relationships among financial statement elements expected to conform to a predictable pattern (e.g., gross margin percentages, expense ratios)
Example: While reviewing Gies Co.'s Q3 financial information, the auditor notices that the gross margin dropped from 42% (Q3 of the prior year) to 28%. This significant fluctuation prompts additional inquiries with management about potential causes — pricing changes, inventory write-downs, or product mix shifts.
Factors to Consider When Reporting
Independence Requirements
The auditor must be independent of the entity to perform an interim review and issue a review report. This requirement applies under both AICPA and PCAOB standards.
If the auditor is not independent, the auditor cannot issue a review report on the interim financial information. Under PCAOB standards, the auditor must be independent per SEC and PCAOB rules. Under AICPA standards, the auditor must comply with the AICPA Code of Professional Conduct and applicable independence rules.
Going Concern Considerations
If conditions or events raise substantial doubt about the entity's ability to continue as a going concern during the interim review:
- The auditor should make additional inquiries and consider the adequacy of disclosures
- The review report may need to include an emphasis-of-matter paragraph or be modified
- This is particularly relevant when the entity's annual financial statements contained a going concern emphasis and conditions have not improved
Example: MAS Inc.'s 2024 annual audit report included a going concern emphasis-of-matter paragraph. During the Q1 2025 interim review, the auditor notes that MAS Inc. has continued to incur losses and has not secured additional financing. The auditor makes additional inquiries and evaluates whether the interim financial information adequately discloses the going concern uncertainty.
Review Report Content and Format
Standard Review Report Elements
| Element | Content |
|---|---|
| Title | "Report of Independent Registered Public Accounting Firm" (PCAOB) or "Independent Auditor's Review Report" (AICPA) |
| Addressee | Typically the board of directors and shareholders |
| Identification | Identifies the interim financial information reviewed (e.g., balance sheet, income statement, cash flows for Q1–Q3) |
| Management's responsibility | States that management is responsible for the preparation and fair presentation of the interim financial information |
| Auditor's responsibility | Describes the auditor's responsibility to conduct the review in accordance with applicable standards |
| Scope description | States that the review consists primarily of inquiries and analytical procedures — substantially less in scope than an audit |
| Negative assurance conclusion | "Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with [applicable framework]" |
| Signature | Firm name |
| Date | Date the review was completed |
Modifications to the Review Report
Departures from the Applicable Framework
If the interim financial information contains a departure from the applicable financial reporting framework (e.g., GAAP) that is material:
| Nature of Departure | Modification |
|---|---|
| Material departure — entity refuses to revise | Modify the conclusion to describe the departure and its effects (qualified conclusion) |
| Material and pervasive departure | Express an adverse conclusion or withdraw from the engagement |
| Scope limitation | Modify the conclusion or withdraw from the engagement if the scope limitation is material |
Example: Kingfisher Industries fails to record a $5 million inventory write-down in its Q2 interim financial information. The auditor concludes the departure is material and modifies the review report to describe the departure and its estimated effects on the interim financial information.
Going Concern
If substantial doubt about the entity's ability to continue as a going concern exists and is adequately disclosed, the auditor may add an emphasis-of-matter paragraph. If the going concern issue is not adequately disclosed, the report is modified.
Emphasis-of-Matter and Other-Matter Paragraphs
The auditor may add emphasis-of-matter or other-matter paragraphs to the review report for matters such as:
- Going concern uncertainties
- Significant subsequent events
- Restatement of previously issued interim financial information
Relationship to the Annual Audit
The interim review and the annual audit are interconnected. Knowledge gained during the interim review may affect the annual audit, and vice versa.
| Connection | Description |
|---|---|
| Knowledge of the entity | The auditor's understanding of the entity from the annual audit informs the interim review procedures |
| Misstatements found during review | Misstatements identified during the interim review may indicate risks relevant to the annual audit |
| Control deficiencies | Control deficiencies observed during interim review affect the auditor's risk assessment for the annual audit |
| Subsequent events | Events identified during the interim review may be relevant to the annual audit |
| Going concern | Going concern issues arising during interim periods must be considered in the annual audit |
The interim review is not a substitute for any part of the annual audit. Even if the auditor performs quarterly reviews throughout the year, the auditor must still perform a complete audit at year-end.
Example: During the Q2 interim review of Illini Entertainment, the auditor discovers that the company changed its revenue recognition policy without proper disclosure. This finding prompts the auditor to plan additional year-end audit procedures around revenue recognition, including expanded substantive testing and evaluation of the accounting change.
SEC Quarterly Reporting Requirements (10-Q)
Public companies (issuers) registered with the SEC are required to file quarterly reports on Form 10-Q within specified deadlines:
| Filer Category | Filing Deadline (after quarter-end) |
|---|---|
| Large accelerated filers | 40 days |
| Accelerated filers | 40 days |
| Non-accelerated filers | 45 days |
Key Points About 10-Q Filings
- The 10-Q includes unaudited interim financial statements that have been reviewed by the independent auditor
- The 10-Q includes condensed financial statements (not full financial statements)
- MD&A is required in the 10-Q
- The independent auditor's review report is not required to be included in the 10-Q filing itself, but the financial statements must state that they have been reviewed
- If the financial statements have not been reviewed, this must be disclosed
The 10-Q financial statements are not audited — they are reviewed. Exam questions may test whether you understand that quarterly financial statements receive limited assurance (review) rather than reasonable assurance (audit). The annual 10-K filing contains the audited financial statements.
Example: BIF Partners, a large accelerated filer, must file its Q3 10-Q within 40 days of the quarter-end. The 10-Q includes condensed financial statements for Q3 that have been reviewed (not audited) by the independent auditor. The financial statements are marked as "unaudited."
AICPA vs. PCAOB Standards for Interim Reviews
| Feature | AICPA (AU-C 930) | PCAOB (AS 4105) |
|---|---|---|
| Applies to | Nonissuers | Issuers (SEC registrants) |
| Who performs | The auditor of the annual financial statements | The registered public accounting firm auditing the annual F/S |
| Primary procedures | Inquiry and analytical procedures | Inquiry and analytical procedures |
| Independence | AICPA Code of Professional Conduct | SEC and PCAOB independence rules |
| Report title | "Independent Auditor's Review Report" | "Report of Independent Registered Public Accounting Firm" |
| Negative assurance language | "We are not aware of any material modifications…" | "We are not aware of any material modifications…" |
| Going concern | Consider and disclose if applicable | Consider and disclose if applicable |
| Filing requirements | Not typically filed publicly | Related to SEC 10-Q filings |
| Communication of misstatements | To management and those charged with governance | To management and audit committee |
| Subsequent events | Consider through the date of the review report | Consider through the date of the review report |
While the core procedures are similar between AICPA and PCAOB interim reviews, the key differences relate to who the standards apply to (nonissuers vs. issuers), the independence framework (AICPA vs. SEC/PCAOB rules), and the regulatory filing context (no public filing vs. SEC 10-Q requirements).
Illini Security Example — Putting It Together
Illini Security is a publicly traded company that files 10-Q reports with the SEC. During the Q2 interim review:
- The auditor performs inquiries of management about unusual transactions, changes in accounting policies, and litigation
- The auditor applies analytical procedures, comparing Q2 results to Q1, the prior-year Q2, and the budget
- The auditor notices that security service revenue is 30% higher than expected — management explains this is due to a new government contract
- The auditor reviews the contract terms and finds the revenue recognition is appropriate
- The auditor identifies no material modifications needed
- The review report expresses negative assurance: "We are not aware of any material modifications that should be made to the interim financial information"
The Q2 10-Q is filed within 40 days, with the condensed financial statements labeled as "unaudited."
Summary
| Concept | Key Points |
|---|---|
| Nature of interim review | Limited assurance engagement — substantially less in scope than an audit |
| Assurance type | Negative assurance ("nothing came to our attention") |
| Primary procedures | Inquiry and analytical procedures |
| AU-C 930 | AICPA standard for nonissuer interim reviews |
| AS 4105 | PCAOB standard for issuer interim reviews |
| Independence | Required — auditor cannot issue a review report if not independent |
| Going concern | Must be considered during interim reviews; may require emphasis-of-matter paragraph |
| Report modifications | Material departures from the framework lead to qualified or adverse conclusion |
| Relationship to annual audit | Interim review findings inform annual audit planning and risk assessment |
| SEC 10-Q | Quarterly filing with unaudited (reviewed) condensed financial statements |
| Filing deadlines | 40 days for large accelerated and accelerated filers; 45 days for non-accelerated filers |
| AICPA vs. PCAOB | Core procedures are similar; differences in applicability, independence rules, and regulatory context |