Audit vs. Review: Understanding the Variances
When it comes to financial reporting in accounting, two key procedures are audits and reviews. An audit is a comprehensive examination of a company’s financial statements, internal controls, and accounting processes conducted by an independent auditor. It involves a thorough analysis and verification of financial information to provide reasonable assurance of accuracy and compliance. Audits are essential for ensuring the integrity and credibility of financial information disclosed by companies to stakeholders and the public, as they involve a detailed examination of financial data, processes, and controls.
A review, on the other hand, is a less extensive evaluation compared to an audit. It involves a review of financial statements by a CPA to assess their plausibility and conformity with accounting standards. While an audit aims to express an opinion on the fairness of financial statements, a review provides limited assurance to stakeholders. Reviews are typically performed when a company or organization does not require the full scope of an audit but still seeks some level of independent verification and validation of their financial information.
Scope and Objectives
Audits delve deep into a company’s financial records, transactions, and internal controls to identify errors, fraud, or noncompliance with regulations. The primary objective of an audit is to ensure the accuracy and reliability of financial statements for stakeholders, including investors, creditors, and regulators. Companies undergoing audits must provide access to their financial documents, systems, and personnel to the external auditors to facilitate a comprehensive examination and verification process.
Reviews, on the other hand, are more focused on analytical procedures and inquiries to assess the plausibility of financial data. The scope of a review is narrower compared to an audit, and the CPA does not provide an opinion on the financial statements’ fairness but offers limited assurance on their credibility. Reviews are often chosen by entities that require some level of assurance on their financial statements but do not need the extensive procedures involved in a full audit.
Level of Assurance and Reporting
One of the significant differences between audits and reviews is the level of assurance provided to users of financial statements. Audits provide a higher level of assurance as auditors express an opinion on whether the financial statements present a true and fair view of the company’s financial position and performance. This opinion is crucial for stakeholders in making informed decisions based on the financial information disclosed by the company.
In contrast, reviews offer limited assurance as CPAs only provide a conclusion on whether they are aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework. While reviews do not provide the same level of assurance as audits, they still offer valuable insights and oversight for companies seeking validation of their financial statements.
Regulatory Requirements and Cost
Audits are often mandatory for public companies, financial institutions, and other entities regulated by government bodies or lenders. The stringent regulatory requirements for audits are designed to ensure transparency, accountability, and trust in financial reporting. Publicly traded companies are mandated to undergo annual audits to provide assurance to investors and regulators that their financial statements are accurate and reliable.
Reviews are typically voluntary and chosen by companies that do not require the level of assurance provided by an audit. They are less costly and time-consuming than audits, making them a popular choice for privately held companies, small businesses, and non-profit organizations looking for an independent assessment of their financial statements. Reviews offer a cost-effective alternative for entities seeking some level of assurance on their financial reporting without the extensive requirements of a full audit.
