Audit vs. Review

Attribute	Audit	Review
Purpose	Systematic examination of financial records, statements, and processes to ensure accuracy, compliance, and reliability.	Assessment of financial records, statements, and processes to provide limited assurance on their accuracy and compliance.
Scope	Comprehensive and in-depth examination covering all aspects of an organization's financial operations.	Less extensive and focused examination, often specific to certain areas or accounts.
Objective	To express an opinion on the fairness and reliability of financial statements.	To provide a conclusion on the reasonableness of financial statements.
Level of Assurance	High level of assurance as auditors provide an opinion on the financial statements.	Limited level of assurance as reviewers provide a conclusion based on their review.
Independence	Auditors must be independent and free from any conflicts of interest.	Reviewers may have a closer relationship with the organization and may not require complete independence.
Procedures	Extensive testing, sampling, and verification of financial records and transactions.	Less extensive procedures, often relying on inquiries and analytical procedures.
Reporting	Audit report includes an opinion on the financial statements and any identified issues or deficiencies.	Review report provides limited assurance and highlights any significant matters or concerns.
Frequency	Usually conducted annually or periodically as required by regulations or stakeholders.	Can be performed more frequently, such as quarterly or semi-annually, depending on the organization's needs.

Introduction

When it comes to financial reporting and assurance services, two terms that often come up are "audit" and "review." While both are important processes in evaluating the financial statements of an organization, they differ in terms of scope, level of assurance, and the procedures involved. In this article, we will delve into the attributes of audit and review, highlighting their key differences and helping you understand when each is appropriate.

Audit

An audit is a comprehensive examination of an organization's financial statements, systems, and controls. It is conducted by an independent certified public accountant (CPA) or a team of auditors. The primary objective of an audit is to express an opinion on the fairness and reliability of the financial statements, providing a high level of assurance to the users.

During an audit, the auditor performs extensive testing of the financial records, transactions, and internal controls. They gather evidence through procedures such as inquiry, observation, inspection of documents, and analytical procedures. The audit process involves a deep understanding of the organization's business, risks, and internal control environment.

Audits are typically conducted annually and are mandatory for publicly traded companies, financial institutions, and other entities subject to regulatory requirements. The audit report issued by the auditor provides an opinion on whether the financial statements present a true and fair view of the organization's financial position and performance.

Review

A review, on the other hand, is a less extensive examination of an organization's financial statements compared to an audit. It is also performed by an independent CPA or a team of professionals, but with a lower level of assurance provided to the users of the financial statements.

During a review, the CPA performs analytical procedures and inquiries to obtain limited assurance that there are no material modifications needed to be made to the financial statements for them to be in conformity with the applicable financial reporting framework. However, a review does not involve the same level of testing and verification as an audit.

Reviews are often conducted on a quarterly or interim basis, providing timely financial information to stakeholders. They are commonly used by privately held companies, small businesses, and non-profit organizations that do not have the same regulatory requirements as publicly traded companies.

Key Differences

Now that we have a basic understanding of what an audit and a review entail, let's explore the key differences between the two:

1. Level of Assurance

The most significant difference between an audit and a review is the level of assurance provided. An audit provides a high level of assurance, as the auditor expresses an opinion on the fairness and reliability of the financial statements. On the other hand, a review provides limited assurance, indicating that the CPA is not aware of any material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework.

2. Extent of Testing

Another important distinction lies in the extent of testing performed during an audit versus a review. In an audit, the auditor conducts extensive testing of the financial records, transactions, and internal controls. This includes verifying the accuracy and completeness of transactions, examining supporting documentation, and assessing the design and effectiveness of internal controls. In contrast, a review involves analytical procedures and inquiries, which are less rigorous and do not involve the same level of detailed testing.

3. Reporting Requirements

The reporting requirements for audits and reviews also differ. In an audit, the auditor is required to issue a formal audit report that includes their opinion on the financial statements. This report is addressed to the shareholders or owners of the organization and is made available to the public. In a review, the CPA typically provides a review report, which is less detailed and does not include an opinion on the financial statements. The review report is often intended for internal use or for limited distribution to specific stakeholders.

4. Cost and Time

Due to the differences in scope and level of assurance, audits are generally more time-consuming and costly compared to reviews. Audits require a significant investment of resources, including the involvement of a larger audit team and more extensive procedures. Reviews, on the other hand, are less time-consuming and less expensive, making them a more cost-effective option for organizations that do not require the highest level of assurance.

5. Regulatory Requirements

Regulatory requirements also play a role in determining whether an audit or a review is necessary. Audits are mandatory for publicly traded companies, financial institutions, and other entities subject to regulatory oversight. These organizations are required to provide a high level of assurance to their stakeholders and the public. Reviews, on the other hand, are not typically mandated by regulators and are often performed voluntarily by organizations to meet the needs of their stakeholders.

Conclusion

In summary, audits and reviews are both important processes in evaluating the financial statements of an organization. While audits provide a high level of assurance and involve extensive testing and verification, reviews offer limited assurance and are less rigorous in their procedures. The choice between an audit and a review depends on various factors, including the organization's regulatory requirements, the level of assurance needed by stakeholders, and the resources available. By understanding the attributes and differences between audits and reviews, organizations can make informed decisions to meet their financial reporting and assurance needs.