What Is the Difference Between an Audit and a Review?

Navigating the financial needs of your business involves making informed choices, especially when it comes to examining financial statements. Understanding the difference between a financial review and an audit can be pivotal for stakeholders and for complying with financial reporting requirements.

SSL Associates is a Chicago-based CPA firm that provides tailored audit and review services across the U.S. We ensure you have the level of assurance you need for informed decision-making and compliance. Below, we dive into the details of each service and help you determine which option might be right for your business.

What Is a Financial Review?

A financial review is a more streamlined examination of a company's financial statements. It primarily relies on analytical procedures and inquiry-based assessments to confirm that a business's financial data is presented fairly. In a review, certified public accountants (CPAs) perform a limited examination that focuses on identifying potential issues through trends, variances, and comparisons. The goal is to assess the company’s financial statements to ensure that no material modifications are needed for accuracy.

Compliance for Reviews

For medium-sized enterprises and some smaller businesses, financial reviews can meet compliance needs without the extensive requirements of an audit. Reviews generally apply when certain revenue thresholds or stakeholder requirements are met and provide limited assurance that financial statements are free of material errors.

Some smaller companies, while not legally bound, may voluntarily seek reviews to enhance credibility. By engaging in a financial review, these businesses demonstrate their commitment to transparency, which can help attract financial support and strengthen professional relationships.

What Does a Financial Review Involve?

• Inquiry of management: CPAs engage in discussions with the company’s management to understand the financial operations, underlying transactions, and other relevant areas.
• Analytical procedures: Accountants evaluate financial information through data comparisons and ratio analyses to look for unusual trends or variances in financial performance.
• Documentation and limited assurance: The outcome of a financial review is a review report that offers limited assurance that no significant changes are needed.

Because a review doesn’t include an in-depth assessment of internal controls or record testing, it provides only a moderate level of confidence.

What Is an Audit?

An audit offers the highest level of financial scrutiny, providing reasonable assurance that a business's financial statements are accurate, complete, and free from material misstatements. This service involves a much more detailed and comprehensive examination.

Legal Requirements and Compliance for Audits

Publicly traded companies and large private firms with significant economic influence or a wide stakeholder base typically undergo mandatory annual audits. This process provides high assurance that financial statements accurately represent the entity's financial health, which is crucial for investor and public confidence. In many cases, federal and state regulations mandate these audits to guarantee a consistent level of accountability and transparency in financial reporting.

Sectors like financial services and healthcare often have strict regulatory standards that require regular audits. These standards are designed to safeguard industry integrity and protect public interest by ensuring that financial practices comply with specific rules and regulations.

Failing to comply with mandatory audit requirements can have serious repercussions, including fines, legal liabilities, and potential disqualification of directors in regulated sectors. Non-compliance can lead to reputational damage, reduced access to funding, and diminished stakeholder trust.

What Does an Audit Involve?

During an audit, CPAs meticulously examine financial records and confirm transactions through various procedures, such as:

• Testing of internal controls: CPAs evaluate the business’s internal financial processes to detect and prevent fraud risks.
• Verification of transactions: This includes corroborating data points with external documents, such as bank statements, contracts, and accounts receivable records.
• Third-party confirmations: Auditors seek confirmation of certain balances, like cash or accounts payable, with external parties for objective verification.
• Detailed examination and reporting: Upon completion, CPAs issue an audit report that includes an opinion on whether the financial statements are a fair presentation of the company’s financial position.

Because of its comprehensive nature, an audit can be more time-consuming and costly than a review. However, it provides reasonable assurance that the audited financial statements conform to generally accepted accounting principles (GAAP) and are accurate enough to support crucial decisions by external stakeholders.

Key Differences Between Financial Reviews and Audits

Though both services aim to evaluate financial data and increase stakeholder confidence, the key differences between an audit and a review lie in the assurance level, scope of procedures, and cost implications. Below, we’ve broken down these differences to clarify which option might fit the unique requirements of your business.

In summary, audits are more suitable for complex businesses, while reviews provide an effective option for smaller businesses looking for limited assurance at a lower cost.

When to Choose a Financial Review vs. an Audit

When deciding between an audit or review engagement, it's important to assess your business's unique needs, goals, and compliance requirements:

• Assess company size and financial complexity: For smaller, straightforward businesses, a financial review may offer the right balance of transparency and cost-efficiency. In contrast, large entities with complex financials generally benefit more from the thorough, in-depth approach of an audit.
• Consider stakeholder requirements: It’s essential to understand the needs of investors, lenders, and other stakeholders. Public companies or those with external investors often require audited financial statements to satisfy regulatory demands and build investor confidence.
• Review regulatory requirements: Examine if your industry or location has regulations that mandate a certain level of financial oversight. In highly regulated sectors, audits are often required to ensure compliance and fulfill oversight responsibilities.
• Anticipate growth and funding needs: Your long-term goals play a role in this decision. Companies aiming for significant expansion, substantial investment, or a potential public offering might prioritize an audit to strengthen their financial credibility.
• Gauge financial and compliance risks: Identify the risk level within your financial reporting and compliance framework. If there’s a higher risk of material misstatement, an audit provides a detailed and reliable check that promotes transparency and risk mitigation.