What Is the Difference Between a Financial Statement Audit and Review?

Financial statements provide a structured overview of a company’s financial performance and position. Investors, lenders, and management rely on these statements to make informed decisions. Independent assurance over financial statements enhances their credibility, fostering trust in the reported financial information. This external verification helps ensure that the statements are free from significant errors.

Understanding a Financial Statement Audit

A financial statement audit is a systematic examination of an organization’s financial records and statements by an independent professional. Its goal is to provide “reasonable assurance” that the financial statements are presented fairly, in all material respects, according to an applicable financial reporting framework, such as Generally Accepted Accounting Principles (GAAP). This process confirms the statements are free from significant misstatements.

Auditors perform extensive procedures to achieve this level of assurance. These include understanding the entity’s internal control system, assessing how company processes prevent or detect errors and fraud. Auditors also perform substantive testing, directly examining transactions and account balances. This involves inspecting documents, confirming balances with external parties, and observing physical assets.

Auditors gather substantial evidence, sampling transactions and supporting accounting data. They prefer evidence from third parties when possible. If internal controls are weaker, auditors may increase substantive testing to gather enough evidence for an opinion.

Understanding a Financial Statement Review

A financial statement review offers a less extensive level of scrutiny than an audit. Its objective is to provide “limited assurance” that no material modifications are needed for the financial statements to conform with the applicable financial reporting framework. This means the reviewer determines if anything significant suggests the financial statements are not presented fairly.

Review procedures are significantly less extensive than an audit. They primarily involve inquiry of management and analytical procedures. Inquiry involves asking about accounting policies, significant transactions, and unusual items. Analytical procedures involve comparing financial data to prior periods, budgets, or industry benchmarks to identify unexpected fluctuations or relationships that might indicate a potential misstatement.

A review does not involve understanding internal controls, assessing fraud risk, or testing transactions with corroborating evidence. This streamlined approach results in a lower level of assurance, suitable when stakeholders need independent verification but not a comprehensive audit.

Core Differences in Assurance and Procedures

The fundamental distinction between an audit and a review lies in the level of assurance and the nature of procedures. An audit provides “reasonable assurance,” a high level of confidence that financial statements are free from material misstatement. This assurance comes from a comprehensive examination of financial records and internal controls.

Conversely, a review provides “limited assurance,” indicating a lower confidence level. The practitioner states they are not aware of any material modifications needed for the financial statements. The reduced scope of a review, focusing on inquiries and analytical procedures, limits the assurance given.

The objective also differs: an audit expresses an opinion on whether financial statements are presented fairly, while a review states a conclusion about whether the accountant is aware of any material modifications. Audits involve detailed testing of account balances, transaction sampling, and third-party verification. Reviews rely more on management representations and a less detailed understanding of processes, with less verification of source documents.

Reporting on Financial Statements

The final output of an audit and a review reflects their differing objectives and levels of assurance. For an audit, the independent auditor issues an audit report that includes an opinion on the financial statements. This opinion states whether the financial statements present fairly, in all material respects, the company’s financial position and performance in accordance with the applicable financial reporting framework. An unqualified, or “clean,” opinion is the most common and indicates that the financial statements are considered reliable.

In contrast, a financial statement review results in a review report that provides a conclusion, not an opinion. This report typically states that, based on the review procedures performed, the accountant is not aware of any material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework. This is often referred to as “negative assurance.” The language used in each report communicates the level of confidence gained, distinguishing the comprehensive assurance of an audit from the moderate assurance of a review.