Audits and reviews are both types of financial statements commonly used in the accounting field. When a company feels like an audit is too much for their needs, they may opt for a review instead.
That’s not to say the two terms, audit and review, are the same. They can’t be used interchangeably. However, some companies prefer using the term ‘review’ when discussing an audit.
And that’s because the term audit scares them to the bone.
- An audit thoroughly examines an organization’s financial statements, internal controls, and accounting practices. At the same time, a review is a less intensive assessment of financial statements for reasonableness and accuracy.
- Audits provide a higher level of assurance than reviews, with auditors expressing an opinion on the financial statements’ fairness, whereas reviews offer a limited guarantee with no formal idea.
- Due to the difference in scope and depth, audits are more time-consuming and costly than reviews, but they provide greater confidence in the accuracy of financial statements.
Audit vs Review
The audit examines financial records and provides an opinion on the accuracy and completeness of statements. The review provides limited statements assurance and is less extensive than an audit. Audits are required by law, while reviews may be used for internal decision-making.
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A review is simply the evaluation of the financial records to check if there is any chance for any modification.
|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 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 test a significant amount of this information.|
|Understanding of the Internal Control||It 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 be conducted within a few hours.||An audit is taxing and has a long list of procedures to be followed. It takes many 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 that would make us believe these financial statements aren’t free of material misstatement, has been brought to our attention.||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 has been prepared following the accounting standards installed in place.
The word reasonable describes 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 material misstatement. These methods include evaluating and studying 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 and performing analytical procedures, audit evidence, observations, conformations, etc.
The auditor involved has to dedicate ample time to assessing fraud risk and understanding the internal control of your entity.
An audit will include the following:
- 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 financial statements or if they can outsource the services to an independent entity.
This process is commonly called compilation, and it adds another layer of independent corroboration, primarily when 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 like “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 a 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 more significant experiences in the field could offer better value.
A review is also meant to provide much-needed comfort to a user: “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 cost involved is the first thing that pops up when differentiating between a review and an audit. That’s because most people consider reviews 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 limited assurance, while an audit offers reasonable assurance.
A review is not a subset of an Audit.
A review generally comprises 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 people use to determine whether or not a financial statement is believable.
That explains why its usage is common among small businesses, primarily those that audit their financial statements.
Inquiries take a more in-depth approach. It requires the auditor to study and evaluate an 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 crucial role in determining the financial position of the underlying entity in all fairness. It’s to be noted that it works on the premise that all the recorded financial transactions are accurate and prepared per the general accounting principle.
A review doesn’t necessarily require material modifications. On the other hand, an audit will require some modifications to the underlying financial statements.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.