Understanding the differences between audits and reviews is important for companies financial compliance and reporting responsibilities. Both audits and reviews play key roles in creating transparency and trust among stakeholders.
While they share a common goal of evaluating financial records, the depth and scope of these examinations differ significantly. This guide looks into the fundamental differences between these two processes, helping you decipher which might be most suitable for your business needs.
What is an Audit
Put simply, an audit is an extensive evaluation of a company’s financial statements and systems aimed at providing a high level of assurance. Auditors assess the accuracy of financial records to verify that they conform to accounting standards. This process involves detailed testing of the company’s financial data and internal controls.
What is a Review
In contrast, a review is less comprehensive than an audit and thus offers only limited assurance. The process primarily involves analytical procedures and inquiries to ascertain whether the financial statements are consistent with accounting standards. Reviews do not involve detailed testing; instead, they rely on discussions with management and limited checks.
What’s the difference
The primary difference lies in the level of assurance provided to stakeholders.
Audits are designed to give a strong level of confidence in the financial statements, suitable for companies with complex operations or those seeking significant investments.
Reviews, offering only a moderate level of assurance, are typically adequate for smaller, less complex entities or those with lower risk tolerance from stakeholders.
Comparison of the Audit and Review Processes
Aspect | Audit Process | Review Process |
Planning and Assessment | Begins with a detailed understanding of the business environment and internal controls to identify risks. | Starts with general inquiries about the business and its financial practices to understand the context. |
Methodology | Involves tests of details, substantive procedures, and compliance checks. | Focuses on analytical procedures and limited inquiries. |
Depth of Testing | Extensive verification through third-party confirmations and physical inspections. | Relies mainly on financial data analysis and discussions with management. |
Assurance Level | Provides reasonable assurance, indicating a high level of certainty on the financial statements. | Offers limited assurance, suggesting no known issues were identified to suggest material misstatements. |
Evaluation and Conclusion | Results in an opinion on whether the financial statements present a true and fair view. | Concludes with a report that highlights any significant findings but provides less certainty. |
Examples Scenarios for Each
Scenarios for a Review
Small to Medium-sized Enterprises (SMEs): For SMEs with simpler operations and lower levels of debt, a review can be sufficient. This scenario is common when these businesses require financial assurance for stakeholders but do not face the high scrutiny of public companies.
Internal Management Use: When internal stakeholders need a periodic check on the company’s finances without the extensive costs of an audit, a review provides a quick snapshot that can guide management decisions.
Preparatory Step: Before undergoing their first audit, some businesses might opt for a review to identify any potential financial discrepancies or to understand better the areas that will need more focus during a full audit.
Scenarios for an Audit
Publicly Listed Companies: These entities are required to undergo annual audits due to regulatory requirements and the need to provide a high level of assurance to a wide range of stakeholders, including investors and regulators.
Complex Operations: Businesses with complex financial structures or those involved in multiple countries often require audits to ensure all parts of the organisation adhere to stringent financial reporting standards.
Significant External Funding: Companies seeking large amounts of investment or debt might undergo an audit to provide potential investors or lenders with assurance about the accuracy of their financial statements.
Legal Requirements and Compliance
Compliance for Audit
Public Companies and Large Proprietaries: These entities must undergo mandatory audits annually. The requirement is enforced to ensure transparency and accountability in businesses that have a significant impact on economic sectors or large numbers of stakeholders.
Industries with Special Regulations: Certain industries, such as financial services or healthcare, may have specific auditing requirements set by regulatory bodies to uphold industry standards and protect public interests.
Compliance for Reviews
Medium-sized Enterprises: While not subject to the stringent requirements of an audit, medium-sized enterprises with revenues falling within specific thresholds may only need to submit reviewed financial statements, unless otherwise stipulated by their stakeholders.
Voluntary Compliance: Smaller entities might opt for reviews when formal audits are not mandated. This approach can still enhance credibility with financial partners or regulatory bodies on a less formal basis.
Consequences of Non-Compliance
Legal Penalties: Failure to comply with mandatory audit requirements can lead to significant fines and legal consequences, including potential disqualification of directors.
Loss of Trust: Businesses that fail to meet legal auditing standards risk losing the trust of investors, lenders, and other key stakeholders, potentially impacting future funding and growth opportunities.
Choosing the Right Option for Your Business
- Assess Business Size and Complexity: Smaller businesses with less complex operations might find reviews sufficient and more cost-effective. In contrast, larger corporations or those with intricate financial structures typically require the detailed analysis that audits provide.
- Consider Stakeholder Expectations: Understand what your investors, lenders, and other key stakeholders expect. Publicly traded companies, for instance, are often required to provide audited financial statements to meet regulatory and investor demands.
- Evaluate Regulatory Requirements: Check if your industry or the nature of your business mandates a specific type of financial examination. Some sectors might have stringent requirements necessitating audits for compliance and oversight.
- Future Plans: Consider your long-term business goals. If you’re planning to expand, seek significant investment, or prepare for a public offering, an audit might be the best choice to establish a strong financial track record.
- Risk Management: Evaluate the level of risk your business faces in terms of financial reporting and compliance. An audit might be necessary if the risk of material misstatement is high, offering a more rigorous assessment and peace of mind.
Why Choose Allen Audit & Advisory
At Allen Audit & Advisory, we specialise in providing both financial reviews and comprehensive audits, tailored to meet the unique needs of your business. Our expert team is committed to ensuring that your financial reporting aligns with both compliance standards and strategic business objectives.
If you’re unsure which option is right for you, contact us today for personalised advice and guidance. Our team of experienced professionals are ready to help you understand your requirements, meet compliance standards, and align your financial strategies with your business goals.
