Key Differences Between Audit and Review Engagements

In the realm of financial statement assurance, audit and review engagements are two fundamental services provided by accounting firms. Both are essential for maintaining the integrity and reliability of financial reporting, but they serve different purposes and offer varying levels of assurance. Understanding the distinctions between these two types of engagements is crucial for businesses, investors, and other stakeholders who rely on financial statements for decision-making. This blog delves into the key differences between audit and review engagements, highlighting their objectives, processes, and outcomes.

Definition and Objectives

Audit Engagement

An audit is the highest level of assurance service that accountants provide. Its primary objective is to express an opinion on whether the financial statements are free from material misstatement, whether due to fraud or error, and are presented fairly in accordance with the applicable financial reporting framework (e.g., IFRS, GAAP).

Review Engagement

A review engagement, on the other hand, provides limited assurance rather than reasonable assurance. The objective of a review is to determine whether, based on the procedures performed, any material modifications should be made to the financial statements for them to be in accordance with the applicable financial reporting framework. It involves inquiry and analytical procedures but does not include the extensive verification and testing that audits require.

Scope and Procedures

Audit Engagement

The scope of an audit is extensive and involves a comprehensive examination of financial records, internal controls, and supporting documentation. Key procedures in an audit include:

1. Risk Assessment: Identifying areas where there is a higher risk of material misstatement.
2. Internal Control Testing: Evaluating the effectiveness of an organization’s internal controls.
3. Substantive Testing: Performing detailed tests on transactions and balances to verify accuracy and completeness.
4. External Confirmations: Obtaining third-party confirmations of account balances and transactions.
5. Physical Inspection: Observing physical assets and inventory.
6. Inquiry and Analysis: Asking questions and performing analytical procedures to understand trends and anomalies.

Review Engagement

The scope of a review engagement is narrower and less intrusive compared to an audit. Procedures primarily include:

1. Inquiry: Asking management and staff about the financial statements and related matters.
2. Analytical Procedures: Applying analytical techniques to identify unusual trends or variances in financial data.
3. Limited Testing: Conducting limited tests of transactions or balances, primarily to corroborate information obtained through inquiry and analysis.
4. Review of Documentation: Examining supporting documentation on a selective basis, without the depth of verification seen in audits.

Level of Assurance

Audit Engagement

An audit provides reasonable assurance, which is a high but not absolute level of assurance. It means that auditors have conducted sufficient and appropriate procedures to form an opinion that the financial statements are free from material misstatement. However, due to the inherent limitations of an audit, such as the use of sampling and the potential for management override of controls, absolute assurance is not achievable.

Review Engagement

A review provides limited assurance, which means the accountant does not express an opinion but concludes that nothing has come to their attention that causes them to believe the financial statements are not fairly presented. This lower level of assurance results from the limited scope of procedures performed during a review.

Reporting

Audit Engagement

The audit report is detailed and includes:

1. Auditor’s Opinion: A statement on whether the financial statements present a true and fair view.
2. Basis for Opinion: An explanation of the audit scope and the basis for the auditor’s opinion.
3. Key Audit Matters: Disclosure of significant issues encountered during the audit that were addressed.
4. Management and Auditor Responsibilities: Clarification of the responsibilities of management and the auditor.

Review Engagement

The review report is more concise and includes:

1. Conclusion: A statement that the review has not revealed any material modifications required for the financial statements.
2. Scope and Basis of Review: A brief description of the procedures performed.
3. Responsibilities: An outline of management’s and the accountant’s responsibilities.

Cost and Time

Audit Engagement

Audits are generally more time-consuming and expensive due to the comprehensive nature of the procedures involved. The detailed testing, verification processes, and in-depth analysis require significant auditor hours and expertise.

Review Engagement

Reviews are less costly and time-intensive. The limited scope of work, primarily involving inquiry and analysis, reduces the time and resources needed to complete the engagement.

Applicability and Usage

Audit Engagement

Audits are typically required for:

1. Public Companies: Mandatory for publicly traded companies to ensure investor confidence and regulatory compliance.
2. Large Private Companies: Often required by stakeholders such as banks and investors.
3. Regulated Industries: Certain industries with stringent regulatory requirements may mandate audits.

Review Engagement

Reviews are commonly used by:

1. Private Companies: Smaller private companies that need assurance but cannot justify the cost of a full audit.
2. Interim Reporting: Periodic reviews of financial statements, such as quarterly reports, to provide stakeholders with timely updates.
3. Special Purpose: Situations where limited assurance is sufficient, such as compliance with loan covenants.

Choosing Between an Audit and a Review

The decision to choose between an audit and a review depends on several factors:

1. Stakeholder Requirements: Stakeholders, such as investors, lenders, and regulators, may specify the level of assurance they require.
2. Cost-Benefit Analysis: Companies must weigh the benefits of higher assurance against the additional cost and effort involved in an audit.
3. Risk Profile: Businesses with higher risk profiles or more complex operations may benefit from the thoroughness of an audit.
4. Regulatory Mandates: Legal or regulatory requirements may dictate the necessity of an audit.

At Intime, an accounting firm in Singapore, we understand the importance of choosing the right type of assurance engagement for your business. Whether you require the comprehensive assurance of an audit or the limited but cost-effective assurance of a review, our team of experienced professionals is here to guide you. We tailor our services to meet your specific needs, ensuring that you receive the highest quality of financial oversight and reporting.

By partnering with Intime, you gain more than just compliance; you gain a strategic advisor committed to your financial integrity and business success. Contact us today to learn more about how we can support your audit or review engagement needs.