What Is an Audit Review vs. a Full Audit?
Clarify the differences between an audit review and a full audit. Understand the varying depths of financial examination and assurance each provides for your reporting needs.
An audit review provides limited assurance on financial statements, offering stakeholders comfort regarding a company’s financial data without the extensive procedures of a full audit. A Certified Public Accountant (CPA) examines financial information to ensure it appears plausible and consistent. Companies, especially private entities, often use audit reviews to satisfy requirements from lenders, investors, or other external parties who need confidence in financial statements but not the highest level of assurance.
Key Characteristics of an Audit Review
An audit review provides limited assurance, also known as negative assurance. This means the CPA states they are not aware of any material modifications needed for the financial statements to conform with the applicable financial reporting framework. This differs significantly from the positive assurance offered by a full audit. Review procedures are less extensive than an audit, primarily focusing on inquiry and analytical procedures.
Inquiry procedures involve asking management and other relevant personnel about accounting practices, financial information recording, and any significant changes or unusual transactions. Analytical procedures compare current financial data with prior periods, industry trends, or expected results to identify unusual fluctuations or relationships that might indicate a potential misstatement. These procedures aim to determine if information suggests material misstatement, not to express an opinion on the fairness of the financial statements.
Audit Review Versus Financial Statement Audit
The distinction between an audit review and a full financial statement audit lies in their purpose, scope, assurance level, and associated cost and time. An audit review provides limited assurance that no material modifications are needed to the financial statements, while a full audit provides reasonable assurance that the financial statements are free from material misstatement. Reasonable assurance is a high, though not absolute, level of assurance that financial statements are presented fairly in all material respects.
The scope of work for each engagement differs considerably. Reviews primarily rely on inquiry and analytical procedures. In contrast, audits involve extensive corroborative procedures, such as external confirmations, observation of inventory, detailed testing of transactions, and comprehensive evaluation of internal controls. This difference in scope directly impacts the assurance provided; reviews offer limited assurance, whereas audits provide a higher, reasonable assurance. Full audits are generally more costly and time-consuming than audit reviews. Reporting also varies, with a review report providing a negative assurance conclusion, while an audit report expresses an opinion on the financial statements.
Conducting an Audit Review
Performing an audit review involves a structured process, beginning with engagement acceptance. This initial stage requires the accounting firm to understand client needs and agree upon engagement terms, formalizing the scope and responsibilities. Following acceptance, the CPA firm plans the review, developing a strategy for inquiries and analytical procedures. This planning is informed by the entity’s industry, operational knowledge, and any specific areas of concern.
Once planning is complete, core procedures are performed. This involves conducting planned inquiries with management and other relevant personnel to gather information about financial data and internal processes. Simultaneously, analytical procedures are applied to financial data to identify unusual trends, significant variances, or inconsistencies that may warrant further investigation. The results from these inquiries and analytical procedures are then evaluated to assess their implications for the financial statements. This evaluation helps determine if any items suggest material modifications are necessary. Throughout the engagement, comprehensive documentation is maintained, detailing the procedures performed, information obtained, and conclusions reached, providing a clear record of the review process.
Understanding the Review Report
The culmination of an audit review engagement is the issuance of a review report. This report is a formal communication conveying the outcome of the CPA’s work and the assurance obtained. It provides limited assurance, often expressed as negative assurance. The report communicates that, based on the review, the accountant is not aware of any material modifications needed for the financial statements to conform with the applicable financial reporting framework.
A typical review report includes several components: a title, the addressee (usually the entity’s management or those charged with governance), an introductory paragraph outlining the scope, and paragraphs describing management’s responsibility for the financial statements and the accountant’s responsibility in performing the review. The conclusion paragraph clearly states the limited assurance. This indicates to users of the financial statements that while the CPA has performed certain procedures, they have not conducted an audit and therefore do not express an audit opinion.