Audit and reviews are both types of financial statements, commonly used in the accounting field. Where a company feels like an audit is a little too much for their needs, they may opt for a review instead.
That’s not to say the two terms, audit and review, are one and the same. They can’t be used interchangeably. However, some companies prefer using the term ‘review’ when they’re actually talking about an audit. And that’s because the term audit scares them to the bone.
Audit vs Review
The difference between Audit and Review is that Audit means a very careful and systematic examination of the financial statements and accounting records of an entity to make sure that there are no errors or chances of any fraudulent activities.
A review is simply the evaluation of the financial records to check if there is any chance for any modification.
Comparison Table Between Review and Audit
|Parameters of Comparison||Review||Audit|
|Level of Assurance||Lower for a review||Higher for an audit|
|Reliance on Management||It begins with the account balance being provided by the management, however only a tiny amount of this information will be tested.||It begins with the account balance being provided by the management. The auditor in question will then proceed to test a significant amount of this information.|
|Understanding of the Internal Control||Isn’t in any way involved with testing the internal control.||Must test the internal control of the underlying client.|
|Work Performed||A review is less taxing and can, therefore, be conducted within a few hours.||An audit is taxing and has a long list of procedures to be followed. It takes a significant amount of hours (usually days) to complete an audit.|
|Price||The cost of conducting a review is relatively cheaper, which makes it affordable to small companies.||The cost of hiring an auditor is relatively high, and therefore less affordable to small companies.|
|Report Provided||A conclusion is always provided, but in a negative form, e.g. nothing has been brought to our attention, that would make us believe these financial statements aren’t free of material misstatement.||Opinions are expressed, but in a positive form, e.g. these financial statements are completely free of material misstatement.|
What is an Audit?
An audit provides more reasonable assurance. It’s meant to show that a financial statement is free of material misstatement and that it’s been prepared in accordance with the accounting standards installed in place.
The word reasonable is used to describe assurance because there’s nothing like absolute assurance. The term reasonable also acknowledges the limitations, risks, and uncertainties that exist, and which no one can predict with precision.
An auditor employs different methods to determine if a financial statement is free of any form of material misstatement. These methods include evaluation and study of internal controls, making inquiries, material inspections, and a physical count of assets.
An audit strives to corroborate the disclosures and amounts in financial statements by obtaining performing analytical procedures, audit evidence, observations, conformations, and so on. The auditor involved has to dedicate an ample amount of their time assessing fraud risk and understanding the internal control of your entity.
An audit will include:
- Confirming with outside parties
- Testing a selected list of transactions by examining all the supporting documents
- Completing physical observations and inspections
- Evaluating your entity’s internal control system
Companies can also choose whether they prefer preparing their own financial statements or if they can outsource the services to an independent entity.
This process is what is commonly referred to as compilation, and it serves to add another layer of independent corroboration, especially when it’s conducted by an independent professional.
What is a Review?
A review looks for potential accounting errors. It does not provide a reasonable amount of assurance. It instead offers limited assurance by looking at the plausibility of a financial statement.
Is the financial statement believable? The opinions cited during a review often flow along the lines of “so far we’ve not encountered any issue” or “the statements don’t conform to the required standards or framework.
Compared to an audit, a review involves less detail. Inquiries have to be made to the management or staff. Plus there’ll be more analytical review of financial statements instead of making substantial balances.
Also, a review doesn’t necessarily have to be conducted by a registered company auditor. But their greater experiences in the field could offer better value.
A review is also meant to provide the much-needed comfort to a user — that “based on the reviews we’ve conducted; we’re not aware of any section of your financial statement that should be modified to conform to the reporting framework and standards.”
Main Differences Between Review and Audit
The first thing that pops up when differentiating between a review and audit is the cost involved. That’s because most people tend to think of reviews as the cheaper alternative to doing a full audit.
Level of Assurance
At the core, the difference rests with the level of assurance that each provides. A review, compared to an audit, offers less depth. It offers a limited assurance, while an audit offers reasonable assurance.
A review is not a subset of Audit
A review generally comprises of inquiries with your company’s personnel, and discussions on trends and ratios. You’re, however, reminded that review is not a subset of audit, contrary to the misconception ferried around.
It’s a tool that business owners use to determine the viability of financial statements. It’s a tool that people use to determine whether or not a financial statement is believable. That explains why its usage is common among small businesses, mostly those that audit their own financial statements.
Inquiries take a more in-depth approach. It requires the auditor in question to both study and evaluates an entity’s internal control entity. It demands that the auditor thoroughly examines every piece of information supplied to them.
An audit has a detailed and preset procedure to follow, of which financial statements play a key role in determining the financial position of the underlying entity in all fairness. It’s to be, however, noted that it works on the premise that all the recorded financial transactions are accurate and prepared as per the general accounting principle.
A review doesn’t necessarily require material modifications. An audit, on the other hand, will require some modifications to be made in the underlying financial statements.
Frequently Asked Questions (FAQ) About Audit and Review
What are the 3 types of audits?
The primary audits are of three types:
Financial audit – It is an audit report conducted by an external auditor to examine the truth and fairness of the financial statements of an entity. It is also called an external or statutory audit.
Operational audit – This type of audit is done to examine the effectiveness of internal controls, governance to achieve organizational objectives and risk management. This audit is conducted by the organization itself to find flaws in the workspace and workflow. It is also called an internal audit.
Compliance audit – It is conducted to make sure the business entity complies with the law and regulations as per the requirements.
What is an audit review report?
An audit is a detailed examination of the financial, operational and compliance information of an organization. A review is conducted to make sure that no material modification or other unfair steps were taken by the organization to prove their financial compliance.
The final report that is created after audit and review is regarded as an audit review report.
Can auditors prepare financial statements?
Preparing financial statements is an additional service. People usually think that preparing a financial statement is a part of the audit but it is not. The auditor is a certified public accountant who examines the financial statements of a company.
The purpose of an audit is to make sure that the financial statements of a company are presented fairly. An auditor is not obligated to create a financial statement.
What triggers tax audits?
There are mainly 9 types of tax audit trigger:
1) When you earn a lot of money, consider it a tax audit trigger. No matter how much tax you pay, there will always be a chance that your financial reports might be audited.
2) If you are claiming itemized deductions that are disproportionate to your income.
3) If you own a cash business like a salon, taxi services, car wash, and restaurant, you are more likely to get audited.
4) Being self-employed is also a tax audit trigger.
5) If you failed to report your taxable income, get ready for a tax audit soon.
6) If you show losses in your business for three consecutive years and still choose to stay actively engaged in the same business, it is considered as another tax audit trigger.
7) If you claim your vehicle as 100% business use, you can expect a tax audit.
8) If you have assets or cash in another country, it may trigger a tax audit.
9) Having investment income is also sometimes considered a tax audit trigger.
As you can see, an audit requires a more detailed approach in establishing reasonable assurance while a review will only follow a few of those procedures to establish limited assurance.
Reviews, therefore, require less work, which makes them less costly compared to audits.
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