Financial Statement Review: How to Avoid the 6 Most Common Pitfalls
A successful financial statement review serves as a powerful tool to assure both you and your stakeholders that your financial data is on point. While less exhaustive than a full audit, a review still demands diligent preparation and organization to prevent stumbling blocks that can derail the process. Below, you’ll uncover the six most frequent pitfalls that can hinder your financial statement review, along with practical strategies to ensure a seamless experience—all presented in second-person to help you prepare effectively.
1. Missing or Disorganized Documentation
The Problem
Your CPA requests key documents—bank statements, ledgers, invoices—and you either can’t find them or have only partial records. This situation halts progress, prolongs the review, and raises questions about your internal controls.
How to Avoid It
Adopt a Clear Filing System: Whether digital or physical, maintain a straightforward system for all financial documents.
Use a PBC (Provided-by-Client) Checklist: Gather every listed item before your CPA begins the review.
Reconcile Accounts Monthly: Consistently organized records help you avoid scrambling when the review date arrives.
2. Lack of Timely Account Reconciliations
The Problem
If you haven’t reconciled key accounts like bank, credit card, or inventory on schedule, you risk unexplained variances. When your CPA spots mismatched balances, it triggers further inquiries and a lengthy hunt for errors.
How to Avoid It
Reconcile Monthly: Make it a habit to reconcile major accounts every month.
Delegate Responsibilities: Assign specific team members to carry out and confirm these reconciliations.
Swiftly Address Discrepancies: Investigate and resolve any irregularities as soon as they arise.
3. Unrecorded or Inaccurately Recorded Accruals
The Problem
Expenses you’ve incurred but not yet paid—or revenue earned but not yet billed—can slip through the cracks. Large accrual adjustments during a review can signal potential weaknesses to your CPA.
How to Avoid It
Track Accruals Diligently: Keep an ongoing record of accrued expenses or payables.
Establish Proper Cutoff Procedures: Ensure revenue and expenses are recognized in the correct period.
Pre-Review Check: Examine your accrual entries before presenting your trial balance to the CPA.
4. Incomplete or Insufficient Disclosures
The Problem
Even if your financial statements align with GAAP, you still need appropriate disclosures—like related-party transactions or significant accounting policies. Omitting these can compromise the credibility of your financial statements.
How to Avoid It
Learn Industry Requirements: Be familiar with your sector’s typical disclosure standards.
Maintain a Disclosure Checklist: Update footnotes annually to reflect any new or unusual transactions.
Early Communication: Inform your CPA about significant or out-of-the-ordinary business activities as soon as possible.
5. Major Last-Minute Adjustments or “Surprises”
The Problem
Your CPA may interpret any late, large journal entries as a warning sign that your numbers aren’t reliable. This suspicion often leads to more scrutiny and extends the review timeline.
How to Avoid It
Conduct Routine Internal Reviews: Resolve issues incrementally rather than all at once at year-end.
Document Significant Adjustments: Provide solid support and logical explanations for any large changes.
Plan Mini-Closes: Schedule periodic financial “mini-closes” throughout the year to minimize last-minute chaos.
6. Minimal Communication with the CPA
The Problem
When you’re slow to respond to inquiries—or fail to mention critical events like obtaining new debt or making major purchases—your CPA might suspect deeper problems.
How to Avoid It
Designate a Point Person: Assign one individual to promptly address your CPA’s questions.
Regular Check-Ins: Proactively discuss any major upcoming transactions or policy changes.
Immediate Updates: Inform your CPA about significant developments (equipment purchases, legal matters, etc.) the moment they happen.
Tips for Streamlined Financial Statement Review
Plan Ahead: Be aware of your review date and meet internal deadlines for closing the books and reconciling accounts.
Leverage Technology: Utilize cloud accounting software and shared folders to speed up document exchange.
Stay Organized: Proper record-keeping is your best defense against the pitfalls outlined above.
Ask Questions: If you’re uncertain about how to record a transaction or comply with new accounting rules, consult your CPA right away.
Conclusion
By proactively addressing these six pitfalls, you’ll significantly improve your financial statement review process, ensuring greater confidence and fewer delays. Consistent organization, timely reconciliations, and open communication with your CPA all contribute to a clear financial picture.
Ready to streamline your financial statement review? Contact Hudson & Empire today. We’ll show you the most effective practices, help you organize your financial documents, and make sure your review engagement boosts trust in your company’s numbers.
Frequently Asked Questions (FAQs)
How is a financial statement review different from an audit?
A review offers limited assurance by focusing on inquiry and analytical procedures. An audit provides reasonable assurance by performing more extensive testing and verifying transactions in detail.
Why are monthly reconciliations critical for a smooth financial statement review?
Consistent monthly reconciliations help you spot and fix discrepancies promptly, reducing the likelihood of surprises that slow down the review.
What are some key disclosures for GAAP compliance?
Common disclosures include related-party transactions, accounting policies, subsequent events, and contingencies. Additional industry-specific disclosures may also apply.
Can Hudson & Empire assist me with my upcoming financial statement review?
Absolutely. Hudson & Empire specializes in preparing businesses of all sizes for their reviews. By partnering with us, you ensure your financial statements are well-organized, accurate, and reliable.
