Deciding Between an Audit and a Review
Even a successful and growing small business should not be alarmed when a third party — a banker, investor, creditor or buyer — asks for audited financial statements. What third parties often really want is some assurance that the financial statements provided by your business are reasonably accurate and free of any major oversights or material errors.
A review and an audit offer levels of assurance:
- Review — This is the most common form of assurance of financial statement accuracy for small businesses. It's not an audit — it is much less extensive and provides limited assurance that your financial statements are basically in conformity with generally accepted accounting principles (GAAP).
- Audit — This is what is usually thought of when the term "auditing financial statements" is mentioned. It's handy when you are trying to sell or merge your business, appropriate, and often required when you're seeking complex or high levels of financing and credit. An audit is a substantial analysis of your financial information — a complex investigation of your financial records, including the general operating practices of your business.
A review is considered the base level of CPA assurance services. In a review engagement, your CPA is required to understand your industry, including its accounting principles and practices. An accountant obtains knowledge about you — your business and the accounting principles and practices. This identifies areas where material misstatements may arise.
In a review, a CPA performs analytical procedures and inquiries to obtain limited assurance about financial statements that are intended to provide a user with a level of comfort about their accuracy. It's substantially narrower in scope than an audit is.
An audit, on the other hand, is the highest level of assurance service that a CPA performs, and it is intended to provide comfort about the accuracy of financial statements. In an audit, your CPA is required to obtain an understanding of your business's internal control and assess fraud risk.
Your CPA corroborates the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination and analytical procedures.
The CPA will issue a formal report that expresses an opinion of whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. CPAs are required to report to you any significant weaknesses in your system of internal controls so you can improve the way you do business.
Even if an organization obtains audited or reviewed financial statements, the CPA can never guarantee that there is no fraud or error within the organization. Both audit and review procedures sample only the information provided in the financial statements so they can provide reasonable assurance that the numbers are accurately stated, but they can never provide absolute assurance.
Audits are much more costly as well and require many hours on your part, answering questions, providing supporting documents and discussing key issues. Sometimes companies start with the review, considering it a pre-audit. Then, when and if an audit is required, the books will have already been reviewed, organized and simplified, and the audit should include fewer questions, so therefore your time is protected. And that will mean lower audit fees.
Which service do you need? Give us a call at (262) 797-0400 and we'll be happy to confidentially discuss your business, your particular situation and which services are most appropriate for you.