Accounting Review vs Audit: Understanding the Key Differences

Introduction

As a company grows and matures, it will likely eventually need the assistance of a certified public accounting firm (CPA firm) to provide some level of financial assurance. Two common services offered by CPA firms are accounting reviews and audits. While both reviews and audits serve a similar purpose of examining financial statements, there are key differences between the two. In this article, we will explore the differences between accounting reviews and audits, their benefits, and when each is appropriate.

Accounting Reviews

An accounting review is a limited assurance engagement performed by a CPA firm. It involves the CPA firm examining the financial statements of a company to determine if they are in accordance with generally accepted accounting principles (GAAP). Unlike an audit, an accounting review does not require the CPA firm to obtain extensive evidence or perform detailed testing.

During an accounting review, the CPA firm will perform analytical procedures, inquiries, and discussions with management to gain an understanding of the company's financial statements. They will also assess the consistency and reasonableness of the financial information provided. The objective of an accounting review is to provide limited assurance that the financial statements are free from material misstatements and are fairly presented.

Audits

An audit, on the other hand, is a comprehensive examination of a company's financial statements and internal controls. It involves the CPA firm obtaining sufficient and appropriate evidence to express an opinion on the fairness of the financial statements. Audits are typically required for publicly traded companies and are often conducted on a yearly basis.

During an audit, the CPA firm will perform a thorough examination of the company's financial records, transactions, and internal controls. They will assess the risk of material misstatement, test the accuracy and completeness of the financial information, and evaluate the effectiveness of internal controls. The objective of an audit is to provide reasonable assurance that the financial statements are free from material misstatements and are fairly presented.

Key Differences

Now that we understand the basic concepts of accounting reviews and audits, let's take a closer look at the key differences between the two:

1. Level of Assurance: An accounting review provides limited assurance, while an audit provides reasonable assurance.
2. Extent of Testing: An accounting review requires less extensive testing compared to an audit.
3. Evidence Gathering: In an accounting review, the CPA firm primarily relies on analytical procedures, inquiries, and discussions. In an audit, the CPA firm obtains detailed evidence through testing.
4. Opinion: An accounting review results in a conclusion on the financial statements, while an audit results in an opinion on the financial statements.
5. Report: An accounting review report includes a statement that the review was conducted in accordance with professional standards. An audit report includes an opinion on the fairness of the financial statements.

When to Choose an Accounting Review or Audit

The decision to choose an accounting review or an audit depends on various factors, including the company's size, industry, regulatory requirements, and stakeholder needs. Here are some scenarios where each may be appropriate:

• Accounting Review: Small businesses, privately held companies, and non-profit organizations may opt for an accounting review to meet the financial assurance needs of their stakeholders without the extensive cost and effort of an audit.
• Audit: Publicly traded companies, financial institutions, and large corporations are typically required by law or industry regulations to undergo an annual audit. The higher level of assurance provided by an audit is necessary for these entities to instill confidence in their financial statements.

Conclusion

Accounting reviews and audits serve important roles in providing financial assurance to stakeholders. While both involve examining financial statements, audits offer a higher level of assurance and involve more extensive testing compared to accounting reviews. The decision to choose between an accounting review or an audit depends on various factors, and it is important for companies to carefully consider their specific needs and requirements.