A review is a reduced form of an audit that provides a reduced level of assurance regarding an entity's financial statements. The auditor who conducts a review must perform analytical procedures and make inquiries of the client concerning the financial statements and accompanying footnote disclosures. Based on these investigations, the auditor can provide limited assurance that the financial statements do not need any material modifications. When a firm is publicly-held, it must obtain a review of its quarterly financial statements, except for the fourth quarter (for which a full audit is required).
The main difference between a review and an audit is that the review does not involve any tests of balances, which are a core part of the steps involved in an audit. This means there are no independent verifications of the client's account balances, for which an auditor would use confirmations. The review also does not involve an examination of the client's system of controls, nor is there any examination for the existence of fraud.
A review is significantly less expensive than an audit, so businesses have a financial incentive to have their financial statements reviewed. However, the parties receiving their financial statements (typically lenders, creditors, and investors) want to be assured that the statements are correct, and so may insist on an audit. If a firm has a review performed and then elects to switch to an audit in the following year, it may find (depending on the circumstances) that the auditors will need to engage in audit activities for the prior year, even though a review was already conducted for that period.