Audit vs. Review Engagements: What’s the Difference?

In the realm of finance and accounting, the terms ‘audit’ and ‘review’ are often thrown around, sometimes interchangeably, with an air of seriousness and necessary procedural weight. However, for those not well-versed in these nitty-gritty details, understanding the distinct purposes and outcomes of an audit versus a review engagement can be akin to navigating through the complexities of the financial world without a map.

For professionals and business owners, distinguishing between these two engagements is crucial; it’s not just about compliance, it’s about maintaining transparency, credibility, and the financial health of the entity under scrutiny. This deep dive into the intricacies of audit and review engagements aims to clarify their differences, purposes, and what they truly mean in the broader landscape of business and finance.

What is an Audit Engagement?

When it comes to financial examinations, an audit is the method under strictest scrutiny. An audit is a comprehensive inspection of an organization’s financial reporting and conveys an opinion as to whether the financial statements are fairly presented, in all material respects, in accordance with the financial reporting framework.

Why Are Audits Required?

Audits serve multiple stakeholders – from shareholders and lenders to regulatory authorities – by instilling confidence and providing an independent assessment of the financial statements. They also function as an early warning system for potential issues.

The Process and Players

An audit engagement involves a detailed examination of financial records, internal controls, and other evidence deemed necessary. Certified Public Accountants (CPAs) are the key players, and they must be independent of the audited organization to ensure objectivity.

What is a Review Engagement?

Comparatively, a review engagement is less involved. It is designed to provide a moderate level of assurance that the financial statements are free from any material misstatements but is less in scope than an audit. A review engagement is not as intensive as an audit and, therefore, provides a lower level of assurance.

The Purpose of a Review

Businesses often opt for a review engagement when the necessity for a full audit is not mandated – typically for small to medium-sized businesses where stakeholders might not require the high level of assurance provided by an audit.

The Scope and Procedure

In a review engagement, financial data and accounting records are examined but the depth and detail of examination are not as extensive as with an audit. The reviewer expresses a lower scope opinion on the financial statements and they issue a report with limited assurance.

Making the Choice: When to Use Audit vs. Review

For organizations, determining whether to undertake an audit or review engagement depends on a variety of factors, including statutory requirements, stakeholder needs, and the organization’s size and complexity.

Business Needs and Stakeholder Expectations

Stakeholder expectations play a vital role. If your company operates in a highly regulated industry or has a large number of shareholders who require detailed and verified financial information, an audit may be the only option. For startups or less complex entities that do not require audited financials, a review might be sufficient during the initial stages. The key is determining who is going to be utilizing the report, understanding how it is going to be utilized and what the users requirements and expectations for the report are.

Cost and Resources

Audits are generally more expensive and resource-intensive than reviews. Unless an audit is required, or requested, by a third-party, regulatory agency, or stakeholder, a Review may be a great option to obtain comfort over the financial report without unnecessarily exhausting internal resources.

Future Considerations

Identifying the expectations of future stakeholders or changes in regulations is also important. Though you may select a review today, you should assess whether an audit will be necessary in the future and plan accordingly.

Navigating the Engagement Process

Before diving into either engagement, it’s critical to understand the process and what’s expected from all parties involved.

Preparing for an Audit

For an audit, meticulous data preparation is key. Client personnel must be ready to provide the necessary records, explain transactions, and give appropriate access to the auditor.

Steps in a Review Engagement

A review typically includes several steps, such as inquiries with management, analytical procedures, and other review procedures necessary in the circumstances. While it is less in-depth than an audit, clear communication and preparation will still be required from the entity.

Going Beyond Compliance: Leveraging Engagements for Business Growth

While audits and reviews are primarily seen as compliance exercises, organizations can leverage the insights gained from these engagements to improve their operations and decision-making processes.

Identifying Areas for Improvement

Both audit and review engagements can highlight process inefficiencies, control weaknesses, and other areas where the organization can enhance its financial management and reporting practices.

Gaining Stakeholder Confidence

By voluntarily undergoing an audit or review, companies demonstrate a commitment to transparency and best practices. This can lead to increased investor confidence and a positive impact on the company’s reputation.

Using Financial Data Strategically

The data and analysis provided through engagements can be used for strategic purposes such as securing financing, valuing the company, and making informed strategic decisions.

The Continuous Financial Journey

The choices between audit and review engagements are not merely binary and should be reflective of the organization’s needs, its stakeholders, and the broader business environment. Understanding the level of scrutiny, assurance, and overall commitment demanded by each engagement is a cornerstone of financial governance.

Furthermore, both audits and reviews should not be seen as one-time events but as part of a continuous cycle of financial assessment and improvement. As companies evolve and markets change, so too should their approach to financial transparency and health.

By obtaining additional clarity in the world of audits and reviews, organizations and professionals can be better equipped to make informed choices and build a robust platform for future growth and success.

Holbrook & Manter’s A&A team is standing ready to help you with your assurance needs. Reach out to us today.