Difference Between Audit and Review

Introduction

Updates have recently been made to auditing standards and guidance notes on related services, which now clearly distinguish between audit services and related services such as reviews, agreed-upon procedures, and compilations.

While a review may bear some similarities to an audit, it is crucial to understand that an audit involves a comprehensive examination of an organization's financial information, enabling the auditor to express an opinion on the accuracy of the same.

Conversely, a review is more of a formal assessment of financial statements with the aim of identifying any necessary modifications. This article seeks to outline the significant variances between an audit and a review in a detailed manner, emphasizing the distinct nature of each service.

During a financial statement review, the auditor must adhere to a specific methodology that ensures a reliable basis for offering limited assurance without necessitating substantial alterations to the company's financial statements to conform with the financial reporting framework. This article provides an in-depth analysis of the distinctions between an 'Audit' and a 'Review'.

Audit

The primary aim of an audit is to offer an unbiased evaluation of financial statements by issuing an audit report. The role of an auditor includes reviewing the organization's reports to ensure adherence to financial reporting standards like GAAP or IFRS. The main objective of an auditor is to confirm the accuracy and integrity of financial statements, with a secondary focus on identifying any errors or fraudulent activities in the client's financial documentation.

Audits are commonly categorized into three primary groups: internal audits, external audits, and audits conducted by the Internal Revenue Service (IRS). The organization's employees conduct internal audits, while independent external auditors carry out external audits.

Audit Calculation

Conducting an audit involves multiple steps. Initially, the organization's management prepares the financial report, ensuring its compliance with legal requirements and financial reporting standards. Once completed, the report undergoes a review and approval process by the organization's director.

1. Subsequently, auditors commence their examination by gaining a comprehensive understanding of the organization's operations and considering any economic or industry factors that may have influenced its performance during the reporting period.
2. For each significant activity mentioned in the financial report, auditors identify and evaluate potential risks that could have a substantial impact on the organization's financial position and performance. Additionally, they assess the internal controls implemented by the organization to mitigate these risks.
3. Based on their assessment of risks and controls, auditors scrutinize management's actions to ensure the accuracy of the financial report. They also examine supporting evidence to validate the information presented.
4. Auditors then assess whether the financial report provides an accurate and unbiased representation of the organization's financial results, position, and cash flows. They also verify compliance with financial reporting standards and, if applicable, the Corporations Act.
5. Finally, auditors prepare an audit report that outlines their professional opinion on the financial report. This report is intended for the organization's shareholders or members, providing them with valuable insights into the audit findings.

External Audits

1. External audits, carried out by third-party entities, are essential in guaranteeing an impartial assessment of a company's financial position.
   
2. The primary goal of these audits is to uncover any possible inaccuracies in financial reports, giving stakeholders assurance in the precision and dependability of the financial data disclosed. Consequently, external audits enable stakeholders to make informed choices concerning the company under review.
3. External auditors adhere to a distinct set of standards separate from those of the organization engaging in their services, emphasizing their independence in the auditing process. This independence allows external auditors to offer candid and objective opinions on the financials, internal controls, or systems under review without being influenced by internal relationships within the company.
4. Internal audits, conversely, encompass auditors employed by the organization itself, whereby audit reports are directly presented to the management and the board of directors. While consultant auditors may not be internal hires, they align their auditing standards with those of the company being audited, contrasting with external auditors who follow their own set of standards. These auditors are typically engaged when an organization needs more internal resources for specific audit functions.

Internal Audit

The IRS performs audits in order to validate the precision of taxpayers' filings and financial activities.

These audits often carry a negative connotation and imply potential misconduct by the taxpayer. However, being selected for an IRS audit does not automatically indicate wrongdoing, as audits are a routine part of the IRS's efforts to ensure tax compliance and accuracy.

IRS Audits (Internal Revenue Service)

IRS audits are usually initiated through a selection process that relies on random statistical formulas to analyze a taxpayer's return in comparison to similar returns.

Additionally, suppose a taxpayer has any business dealings with an individual or company that has been identified as having tax errors during an audit. In that case, they may also be chosen for an audit.

Review

An auditor conducts a review to evaluate financial data and provide limited assurance. The review focuses on assessing financial statements for compliance with reporting standards. The primary goal is to verify the lack of major errors, even though it provides a lesser degree of assurance compared to an audit.

Unlike an audit, a review does not delve deeply into internal controls or involve extensive audit procedures. Instead, it relies on analytical procedures and inquiries made by the auditor to form conclusions.

Reviews have a narrower scope compared to audits and are typically conducted for smaller companies with fewer resources. The main objectives include discussing financial trends and ratios with stakeholders and implementing corrective measures if needed.

Advantages of Audit

Here are some Advantages of Audit

• Assures financial statements and operations.
• Uncovers instances of fraud and errors.
• Promotes transparency and accountability.
• Enhances reputation and credibility.
• Facilitates informed decision-making.
• Strengthens risk management and control procedures.
• Identifies opportunities for improvement and cost savings.
• Ensures compliance with legal and regulatory obligations.

Disadvantages of Audit

Here are some Disadvantages of Audit

• It can be time-consuming and disruptive to business operations.
• It can be expensive.
• It can result in negative publicity if the findings are unfavorable.
• May not identify all fraud or non-compliance.
• Dependent on the auditor's skill and objectivity.
• It may keep all inefficiencies and areas for improvement private.
• It might be necessary to tackle the underlying factors contributing to the problems.
• It may not prevent future fraudulent activities.

Advantages of Review

• Enhancing Financial Stability: Conducting a review enables the identification of weak areas within a financial entity's operations, allowing for targeted improvements that can lead to an overall enhancement in financial stability.
• Promoting Openness: The review process provides an impartial assessment of a financial institution's financial performance, promoting a culture of openness and responsibility within the company.
• Facilitating Informed Choices: By gaining a comprehensive insight into the entity's financial well-being, informed decisions related to investments, expenses, and strategies can be made confidently.
• Strengthening Risk Management: The review can pinpoint potential risks, empowering the entity to proactively address and manage them to prevent adverse impacts on its financial health.
• Building Trustworthiness: A well-executed review bolsters the credibility of the financial entity, especially among stakeholders and regulatory bodies, showcasing a commitment to sound financial practices and transparency.
• Increased Efficiency: The evaluation procedure has the potential to identify inefficiencies in financial processes, enabling the organization to optimize operations and enhance overall efficiency.

Disadvantages of Review

• Expense: Conducting a review can incur significant costs, demanding substantial financial resources and time commitments from both internal and external parties.
• Time-Consuming: The review process can be protracted and disruptive to regular operations, requiring considerable time and effort from employees.
• Prejudice: The review process may be influenced by intentional or unintentional biases, potentially resulting in inaccurate or unreliable outcomes.
• Restricted Scope: The review may only offer a snapshot of the financial entity's performance at a specific moment, failing to capture the entity's overall financial well-being fully.
• Resistance to Change: The review's findings may identify areas for improvement that encounter resistance from employees or stakeholders.
• Limited Applicability: The review's recommendations and solutions need to be more tailored and relevant to the financial entity's unique circumstances, potentially rendering them ineffective.

Commonalities Between Audit and Review

Commonalities between Audit and Review include.

• Audit and review both entail the scrutiny and assessment of financial data.
• Both necessitate a systematic and unbiased methodology.
• The primary goal of both is to offer an assessment or judgment on the financial data under scrutiny.
• Both rely on generally accepted accounting principles and standards for their assessments.
• Testing and verifying transactions and balances may be part of both processes.
• Recommendations for enhancement may arise from both.
• Either an internal or external entity can carry out both procedures.

Key Differences Between Audit and Review

The main differences between an audit and a review can be summarized as follows.

1. Review is an official evaluation of account books to determine if any changes are necessary. At the same time, an audit is an independent examination of an organization's account books to provide an opinion based on evidence or facts.
2. An audit provides a higher level of assurance that the account books are free from any relevant errors, although it does not guarantee complete assurance. On the other hand, a review provides an ordinary level of assurance that the reviewed details are free from any significant errors.
3. During an audit, the auditor provides a positive assurance statement in the audit report, whereas in a review, the auditor gives a negative assurance statement in the report.
4. In terms of cost, a review is less expensive compared to an audit, which is more costly.
5. Audits are classified into various types, including internal, external, statutory, and non-statutory. On the other hand, reviews are categorized as system reviews, engagement reviews, firm-on-firm reviews, association reviews, and other types.
6. Larger or more complex organizations typically require an audit at some point, while smaller organizations with revenues below $500k can often suffice with a review.

Difference between Audit and Review

Conclusion

A review and an audit are two distinct processes with different levels of rigor and assurance. An audit involves a thorough examination of accounting methods and internal control systems, ensuring a high level of confidence in the accuracy of financial statements by minimizing significant misstatements. Conversely, a review provides a moderate level of assurance by identifying any material misstatements in the reviewed information. In an audit report, the auditor issues a positive assurance statement, while a review report includes a negative assurance statement. It is crucial to acknowledge that business organizations are legally obligated to undergo audits, whereas reviews are discretionary.