A Quick Outline of an Audit vs A Review

Non-public companies are traditionally not required to have audits of their financials each year. If a private company is hunting for some level of assurance, there is a good chance that they’ll want to think about either having an audit performed, or a review performed. The following is a brief discussion on the differences.

An audit provides a much higher level of assurance than a review. The purpose of a review is to show that nothing came to the attention of the public accountant to signal the financial reports were not legitimate.
This negative assurance simply says that nothing stuck out to the accountant that seemed out of the ordinary. An audit on the other hand, offers a high level of assurance. The result of a clean audit is the statement that the financials are free from material misstatements. An audit can be trusted to demonstrate the correct presentation of the financial statements way more than a review can.

Due to this, some places (such as banks offering financing) will require an audit of the financial statements before offering a company a loan, and can even require them to have an audit each year while they have the loan to make certain that they’ll be in a position to pay the interest and debt repayments. An audit allows the banks to be more secure about lending to companies, which could also permit them to lower the rate of interest on the loan.

When an audit is performed, the chartered accountants do extensive work with the business’ internal controls. A review only consists of dialogues with certain individuals at the business, performing comparison testing with ratios and taking a look at previous financial statements to look for plausibility, and making enquiries about monetary, operating and contractual details. A review doesn’t involve inspecting the business’ internal controls or any of the other highly detailed tests that are included in an audit.

While an audit provides a raised level of assurance and likely some recommendations for enhancements with internal controls, it is also more costly. If an audit isn’t required by a financing company or the like, then there is not very much of a reason to have one performed when a review would suffice.

Rob Green is an accounting article writer for TWM & Co., a Vancouver Chartered Accountant firm.

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